Stocks continued to rally last week following the first round of France’s presidential elections. Centrist candidate Emmanuel Macron emerged as the favorite to win the May 7th run off vote against far-right candidate Marine Le Pen; the latest polls show Mr. Macron, a political neophyte, leading with 60% of the vote. The two offer starkly contrasting visions for France and, by extension, the future of Europe. Mr. Macron’s candidacy has been cast, especially in light of ongoing Brexit negotiations, as a re-commitment to the EU project which began in 1950. In contrast, Ms. Le Pen represents a turn towards nationalism which many analysts believe may further splinter the EU. Meanwhile, President Trump revealed his initial proposal for comprehensive tax reform; the package includes lowering the corporate tax rate, a one-time tax to repatriate cash held by foreign subsidiaries, simplifying individual tax brackets, doubling the standard deduction, and eliminating certain exemptions (while maintaining the current treatment of mortgage interest expense and charitable contributions). Notably absent were measures to offset the expected reduction in tax revenues resulting from the various proposals. Not surprisingly, the one-page announcement was seen as a preliminary bid in what will likely be an extended negotiation process.
The preliminary 0.7% estimate of first quarter GDP came in below the 1.00% forecast. The slowdown in consumer spending, car sales and inventory growth weighed on the economy’s performance during the period. Still, the report included several encouraging details: residential investment increased by 13.7% while non-residential investment grew 9.4%; and, final sales of domestic goods and services, which contributed 1.1% in the fourth quarter, improved to 1.6%. The weak GDP report contrasts with better-than-expected corporate earnings reports. So far, more than half of the companies in the S&P 500® Index have reported first quarter results; the 12.5% blended earnings growth rate is well above the 9.0% estimate at the beginning of the reporting season. The forecast calls for a 7.5% increase in sales, the third consecutive quarterly gain, led by a 32.7% increase in the Energy sector. The conflicting data may raise questions about the true state of the economy. A closer look at other measurements, including robust business and consumer confidence readings, low unemployment and rising wages, suggest that economic conditions are better than the GDP report indicates. For example, the forecasts for increased corporate sales and earnings (approximately +5% and +10%, respectively) through the remainder of 2017 support the expectation for accelerating GDP growth as the year progresses.
Many corporate executives are commenting on positive trends; the growth opportunities they anticipated following last year’s third quarter results are now more evident. Comments from Energy executives, though, remain mixed as the sector’s recovery is still in its early stage. Some reported improved earnings results, and more companies are discussing tangible growth opportunities. The recovery in the Energy sector will generate additional growth in many parts of the domestic and global economies. For these reasons, and absent any major geopolitical events, the equity bull markets should be sustainable.
Source: Pacific Global Investment Management Company
Chart reflects price changes, not total return. Because it does not include dividends or splits, it should not be used to benchmark performance of specific investments.
Last Week's Headlines
- The initial estimate for the first-quarter gross domestic product showed economic growth slowed compared to the fourth quarter. The GDP increased at an annual rate of 0.7% in the first quarter. In the fourth quarter of 2016, the GDP increased at an annual rate of 2.1%. While the first estimate is based on source data that is incomplete or subject to further revision, this quarter's growth rate is the slowest in three years. Weakened consumer spending cut into economic growth in the first quarter. Consumer spending increased a mere 0.3%, which is the worst showing since the end of 2009. Consumers spent less on high-cost items such as cars, and home heating during a mild winter. Conversely, residential investment grew at a 13.7% pace and nonresidential (business) investment, which has been sluggish, climbed 9.4%. Rising inflation may be cutting into consumers' paychecks, prompting them to hold off on buying nonessential big-ticket items.
- New home sales continued to surge in March, according to the latest figures from the Census Bureau. Sales of new single-family homes in March were 5.8% higher than the revised February sales figures. The sales rate is 15.6% above the March 2016 estimate. The median sales price of new houses sold in March 2017 was $315,100. The average sales price was $388,200. The seasonally-adjusted estimate of new houses for sale at the end of March was 268,000. This represents a supply of 5.2 months at the current sales rate.
- New orders for manufactured durable goods in March increased $1.6 billion, or 0.7%, to $238.7 billion, according to the Census Bureau. This increase, up three consecutive months, followed a 2.3% February increase. Excluding transportation, new orders decreased 0.2% — the first decline in six months. Excluding defense, new orders increased 0.1%. Transportation equipment, also up three consecutive months, drove the increase, climbing $2.0 billion, or 2.4%, to $83.3 billion. On the other hand, orders for automobiles and machinery slowed. Shipments of manufactured durable goods in March, up four of the last five months, increased $0.6 billion, or 0.2%, to $239.8 billion. Unfilled orders for manufactured durable goods in March, up two consecutive months, increased $2.5 billion, or 0.2%, to $1,119.0 billion. Inventories of manufactured durable goods in March, up four of the last five months, increased $0.5 billion, or 0.1%, to $385.7 billion.
- The international trade deficit was $64.8 billion, an increase of $0.9 billion in March from the prior month. Exports of goods were $125.5 billion, $2.2 billion less than February exports. Imports were $190.3 billion, $1.4 billion less than the previous month.
- Consumer confidence in the economy took a step back in April following an increase in March. The Conference Board Consumer Confidence Index® registered 120.3 in April, down from 124.9 in March. The Present Situation Index decreased from 143.9 to 140.6 and the Expectations Index declined from 112.3 last month to 106.7. The Index of Consumer Sentiment from the University of Michigan inched up in April to 98.0 from 96.9 in March. Consumers were bullish about current economic conditions and expectations for further economic growth.
- In the week ended April 22, the advance figure for seasonally adjusted initial claims was 257,000, an increase of 14,000 from the previous week's revised level of 243,000. The advance seasonally adjusted insured unemployment rate remained at 1.4% for the second consecutive week. The advance number for seasonally adjusted insured unemployment during the week ended April 15 was 1,988,000, an increase of 10,000 from the prior week's revised level of 1,978,000.
Eye on the Week Ahead
The all-important employment figures for April are out at the end of the week. March saw new hires for the month drop to under 100,000 for the first time in a long time. However, the unemployment rate fell to 4.5% while average hourly earnings continue to rise — all of which points to an expanding economy.
