Market Pulse: On the economy and stocks
August 22, 2018
Second quarter GDP grew at a strong 4.1 percent annual rate even though inventory drawdowns weighed on growth by 1 percent.
Final domestic sales were even better, up 5 percent. People are buying, companies are spending, employers are hiring, capital investment is up. Times are good.
Naysayers point out that rising exports boosted growth, suggesting that companies are anticipating tariffs from other countries soon. They also said that 2 percent growth was "the new normal" and 3 percent annual growth was unachievable. I disagreed. In my Jan. 11 "A Peak Into 2018 Financial Markets" article I predicted 2018 GDP would reach 3 percent. I still believe it will.
In that article was another prediction: "the Fed's action will frustrate President Trump and incoming Fed Chairman Jerome Powell will feel the heat."
Sure enough Trump sent tweets blaming the Fed saying, "Tightening now hurts all that we've done." Chairman Powell, a Trump appointee, will become the fall guy if growth slips back to 2 percent.
Strong second quarter growth spilled into corporate earnings. Operating earnings for S&P 500 companies were up nearly 25 percent on a 10-percent jump in revenues. Profits for energy companies led the way, rising more than 100 percent.
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Lower corporate taxes were a major benefit for S&P companies (and others) and so was a surge in the savings rate, to some extent because the tax cuts gave people more money to save or spend.
There are concerns. The Congressional Budget Office projects the federal budget deficit will be $800 billion this year. So far the market is taking the increasing supply of Treasuries needed to finance it in stride.
The bull market marches on with some fluctuations and profit-taking. These short-term moves should be of little or no concern to investors. The long-term picture, which is what really matters, is good.
While many say we are late in a bull market or that the economic recovery/expansion is long in the tooth, there is no factual basis to support such concerns. The economy is strong but clearly not overheating.
Valuations are average. Interest rates are historically low. Tax rates are lower than they've been in decades, maybe ever. Confidence — with consumers, homebuilders, CEOs, small businesses — is very strong. Real personal income is rising.
As I've said before, these are not historically average times; stocks deserve better than average valuations, which is what they have now. After some volatility (until mid-October this is a seasonally weak period), expect a strong end-of-year rally.
David Vomund is an Incline Village-based fee-only money manager. Information is found at http://www.VomundInvestments.com or by calling 775-832-8555. Clients hold the positions mentioned in this article. Past performance does not guarantee future results. Consult your financial advisor before purchasing any security.