- Economic Growth Picks Up; U.S. GDP Grows 4.1% in Q2
- Fed Faces Unique Pressure on Trump’s Rate-Hike Remarks
- Looking Ahead: Fed Meeting, Housing Prices, Unemployment and More
Facebook’s post-earnings swoon Thursday prompted concerns about whether the high-flying tech sector is finally coming back to Earth, as the social media company’s stock tumbled 19%, wiping $119.1 billion off of its market value. The size of the loss was greater than 457 of the 500 companies in the S&P 500 and a great reminder that diversification pays as the S&P 500 index finished the day down just 0.3%. In fact, despite all of the headline furor, you might be surprised to hear that on a total return basis (dividends always count), the S&P 500 hit its 12th all-time high of the year at Wednesday’s close.
For the year through Thursday, the Dow Jones Industrial Average has returned 4.5%, while the broader S&P 500 has gained 7.3%. The MSCI EAFE index, a measure of developed international stock markets, is down 0.6%. As of Thursday, the yield on the Bloomberg Barclays U.S. Aggregate Bond index has climbed to 3.37% from 2.71% at 2017’s end. On a total return basis, the U.S. bond market has declined 1.7% for the year.
Economic Growth Picks Up; U.S. GDP Grows 4.1% in Q2
The first estimate of second-quarter gross domestic product (GDP) released this morning showed that the U.S. economy expanded at a 4.1% annualized pace, nearly double the 2.1% growth rate from the first three months of 2018. It’s the fastest quarterly growth since the third quarter of 2014. Of course, it’s important not to confuse an annualized, quarterly growth number with annual growth—this could well be a blip fueled by tax cuts. On a year-over-year basis, the economy’s 2.8% rise is just slightly above the 2.6% average since the end of the 1970s.
Our increasingly consumer-driven economy was on display in last quarter’s accelerated growth pace as the health of the job market has spurred spending. When people are working and have job security, they’re more at ease making both large and small purchases. And prices haven’t risen enough to curtail consumer behavior; inflation is still running at only a 2% pace or so.
The question worth asking now: Is this as good as it gets? With no shortage of opinions on that topic, we’ll stay focused on what the data says while remaining attuned to the ways in which discordant midterm elections could move investor emotions and dictate fear-driven negative market momentum over and against the fundamentally slow-growth-not-no-growth road that we’re actually still on.
Fed Faces Unique Pressure on Trump’s Rate-Hike Remarks
The Federal Reserve Board of Governors finds themselves in a bit of a bind before their next two-day meeting begins on Tuesday. President Trump’s recent comments that more Fed rate hikes “[hurt] all that we have done” broke the longstanding Chinese wall between the executive branch and monetary policymakers, setting up a complicated dynamic for Fed governors who don’t want to be seen as bowing to the wishes of the White House.
The most likely scenario where confusion could reign would be one where Chairman Jay Powell and his cohorts wish to suspend raising interest rates if the economy hits a soft patch, but worry that any pause would be misconstrued as having been influenced by the West Wing—and they end up raising rates anyway. That’s hardly ideal decision-making.
Plus, presidential influence could cause the Fed to become less, rather than more, transparent. A silver lining for the Fed next week is that even before the President’s comments, most market participants were not expecting any change in Fed policy in August. This pot may not start to boil over until the following Fed meeting in late September.
Against a backdrop of economic and earnings growth, domestic and global markets remain prone to political monkey wrenches being thrown into their gears. It’s our job to take politics out of your portfolio, but investing can be emotional. After running hard and being rewarded with sizable gains in this long bull market, it might make sense to review your risk tolerance—while we’re in the calm before the midterm election storm.
Looking Ahead: Fed Meeting, Housing Prices, Unemployment and More
Next week, earnings continue to flood in, but the market has already priced in the upbeat second-quarter trends as set against the headwind of trade-war concerns.
We expect market attention will shift toward the economic bricks on the road: Personal income, spending and savings, inflation gauges, the Fed meeting and policy announcement, consumer confidence, housing prices, construction spending, car sales, factory orders, manufacturing and service sector data and the unemployment rate for July.
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Please note: This update was prepared on Friday, July 27, 2018, prior to the market’s close.
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