- Corporate Tax Cuts Send Profits Higher
- GDP Growth Reflects Strong Consumer, Strong Economy
- Fed on Track to Raise Interest Rates
- Looking Ahead: Manufacturing, Unemployment and More
Strong corporate profit growth and signals that the U.S. was close to signing a new trade agreement with Mexico (and maybe Canada) gave investors and traders the confidence to push major indexes into record territory this week—the S&P 500 (large U.S. companies), Nasdaq (tech companies) and Russell 2000 (small companies) closed at all-time highs Wednesday before edging down slightly yesterday.
For the year through Thursday, the Dow Jones Industrial Average has returned 6.8%, while the broader S&P 500 has gained 9.9%. The MSCI EAFE index, a measure of developed international stock markets, is down 1.6%. As of Thursday, the yield on the Bloomberg Barclays U.S. Aggregate Bond index has climbed to 3.31% from 2.71% at 2017’s end. On a total return basis, the U.S. bond market has declined 1.0% for the year.
Corporate Tax Cuts Send Profits Higher
While the companies in the S&P 500 index get most of the media’s attention, data on overall corporate profits, courtesy of tax returns from all companies large and small, public and private, tell a much more complete tale of the state of businesses in the U.S. In fact, former Federal Reserve Chair Alan Greenspan once said that the Department of Commerce data on after-tax profits—which comes from the IRS—is “far less subject to the spin evident in reports to shareholders.”
And the most recent data was strong, showing after-tax profits increased at a 10% annualized pace in the second quarter. While those numbers sound great, history shows that profits grew at a 37% pace the quarter before and at a 20% pace over the final three months of 2017. And, again, that’s after taxes, which were cut dramatically at year-end—taxes paid by U.S. companies are down 33% from the same time last year. So, the results come as no surprise, really; when you cut taxes by a third, of course you’re going to see some pretty good numbers.
Another way to look at it is that year-over-year after-tax profits were up 16% compared with a 15% rise in Q1 and just a 7% gain in the final quarter of 2017. It wouldn’t rattle us to see that pace lose a step in future quarters. That doesn’t mean profits and earnings will contract, just that they may grow at a slower rate.
Nothing in this week’s economic data suggests that our economy is about to detour from its moderate-growth road. Consumers are flush, businesses are caffeinated by tax cuts and economic growth is on pace for the best yearly expansion since 2005. It remains to be seen if we’re in as-good-as-it-gets territory, but for now, there’s not a whole lot of sand in the gears as we head into 2018’s final months.
GDP Growth Reflects Strong Consumer, Strong Economy
One of this week’s most anticipated reports showed a slight upward revision to second-quarter economic growth—4.2% represents the best GDP growth rate since the third quarter of 2014. As we have often noted, the U.S. is a consumer-driven economy. From all the data we’ve seen, the consumer is in fine shape and appears ready, willing and able to continue spending.
For one thing, consumer confidence is as high as it’s been in nearly 18 years, with more people expecting to purchase big-ticket (read: expensive) items in the six months ahead. People tend not to buy such goods—homes, cars, major appliances—when they’re uneasy about their prospects for future income. But American workers are reporting their highest job satisfaction in over a decade. Bigger paychecks (income rose 0.3% last month) translated into more spending, which rose 0.4% in July.
Fed on Track to Raise Interest Rates
With unemployment low, inflation gradually rising and the economy on an upward trajectory, it should come as no surprise that the Fed remains on course to raise short-term interest rates. Last Friday, Fed Chair Jay Powell’s speech at the annual Jackson Hole, Wyoming conference of central bankers pretty much cemented his preference for a 0.25% fed-funds-rate hike in late September. And if we were bettors (we’re not), our money would be on another 0.25% hike after the Fed’s December meeting, which would put the federal funds rate at 2.50% as we head into 2019. That’s still pretty darned low on a historical basis.
Interest-rate hikes should be seen as a vote of confidence in continued economic growth. Raising rates now is also a way for Fed officials to add to their arsenal of recession-fighting weapons should optimistic business leaders and consumers change their tune.
Looking Ahead: Manufacturing, Unemployment and More
Next week, the markets and Braver Capital’s offices will be closed Monday in observance of Labor Day. On Tuesday, we’ll be back at our desks to assist you. When we return, we’ll be watching how investors react to, and making our own assessments of, key reads on manufacturing, construction spending, vehicle sales, the service sector and the state of the jobs market, including the August unemployment rate.
With the last long weekend of the summer ahead of us, we wish you an enjoyable time on the beach, at the grill, focusing on your friends and families or just relishing an extra day off before September and the midterm election season heats up.
If you’d like to learn more about our tactical or fundamental strategies, please contact Steve Johnson at 844-587-7393 or firstname.lastname@example.org.
Please note: This update was prepared on Friday, August 31, 2018, prior to the market’s close.
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