Business Insider is offering a new feature in our “10 Things You Need To Know Before The Opening Bell” email newsletter where we interview top strategists, economists, and traders to get their thoughts on key market questions.
Our first interview is with Jeffrey Kleintop, the chief market strategist at LPL Financial.
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BUSINESS INSIDER: To what extent do you think poor weather has impacted this winter’s economic data?
JEFF KLEINTOP: It’s been significant, but not the whole story as growth remains below average. While seasonal adjustments attempt to capture normal variations, data from NOAA shows that snowfall and cold (heating degree days) have been extreme this winter with the worst coming in February and likely to impact data yet to be reported. The stock market is clearly giving the data the benefit of the doubt since the combination of genuinely weak economic data and ongoing tapering would be giving investors more of a cold chill than what we have seen. I would expect a few more “growth scares” this year like we saw in January that take stocks down 5%+ before reversing.
BI: What’s the big story that nobody is talking about right now?
JK: The consistency of domestic equity mutual fund inflows this year during the January pullback and since reported by ICI is a big story. Investors chase five-year returns and they keep going up as we roll off the last of the financial crisis bear market. The 5 year annualized return for the S&P 500 is now 25%! The second wind for the bull market from individual investors finally rotating back to stocks may be being underestimated.
BI: Are you optimistic about Janet Yellen as Fed chair?
JK: She is the first Fed chair in over three decades to have hair–it will take some getting used to. But seriously, she marks a shift in the balance of focus on the Fed’s dual mandate from inflation to employment. The longer-term impact may be a steeper yield curve than what we have been used to or the market currently expects.
BI: The stock market is roaring back to all time highs. Do issues in EM not have as big an impact on U.S. markets as people argued a few weeks ago?
JK. The weakness in emerging markets should not be seen as a signal of a broad global economic deterioration that could spread and tip the world back into a global recession. In fact, just the opposite — many emerging markets had become dependent upon global economic weakness. The soft global economy of the past five years prompted the Federal Reserve (Fed) and other central banks to pump money into the global financial system, encouraging capital to flow into the emerging markets and allowing them to run unsustainable current account and budget deficits. Now, as global growth is improving, we are seeing the Fed begin to slow its bond purchases, and that change is prompting some emerging markets to have to quickly adjust by devaluing their currencies and sharply slowing spending. So, much of the turmoil in the emerging markets is actually the result of the improving economic growth around the world and not a sign that it is weakening.
BI: What’s something you’ll be watching this week and next?
JK: I will be watching sector leadership. With economic data mostly missing expectations this year it makes sense that defensive sectors like utilities and health care have outperformed this year and posted solid gains. But much of that performance may be the result of a poor stock market return YTD and falling yields than a true rotation to defensives. In fact, cyclical sectors have been generally outperforming over the past month as stocks rebounded. If the data starts to improve as the weather improves, defensive and interest rate sensitive sectors like Utilities would be at risk as rates move higher.
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