Less than two months ago, conventional wisdom thought the US economy was in real trouble. The consensus expected real GDP would barely grow, if at all, in the first quarter of 2019. Many were in a tizzy about the "second derivative," of growth, obsessing that near zero growth in Q1 would mean three straight quarters of deceleration in real GDP, which if extrapolated meant a recession could be lurking.
Oops! The US economy accelerated in the first quarter, with real GDP up at a 3.2% annual rate for the quarter and from a year ago. So much for the Fed needing to cut rates, the idea that slower foreign growth would drag the US down, or that the sugar high of easy money and tax cuts was over.
In fact, evidence is now building that "potential growth" in the US economy has accelerated. We think this is due to tax cuts, actual deregulation, and lower odds of future regulation.
This week, the government's productivity estimates should reflect this acceleration in potential growth. Output per hour increased at a 0.7% annual rate from early 2010 through early 2017, but likely grew faster than 2.0% in the past year – a clear sign of more rapidly expanding standards of living. And the underlying wage data show that lower income Americans are seeing faster wage growth than the overall average. Faster economic growth, not more government redistribution, is the only way to permanently lift living standards.
The S&P 500® Index and the Nasdaq reached record highs last week as the market rebound continues. Analysts have closely monitored the progress of the S&P 500®; Friday’s close (2939.88), which is on par with the Index’s previous record high last October, is an important technical threshold for the markets to move higher. For the week the Nasdaq led all indices with a 1.85% gain followed by the Russell 2000® Index (1.66%); the S&P 500® rose 1.20% while the Dow Jones Industrial Average dropped 0.06%. Last Friday the Commerce Department reported first quarter GDP growth of 3.2%, well above the 2.3% forecast; the reading, the highest first quarter growth rate in four years, confirms the continued expansion of the U.S. economy. The somewhat disappointing 1.2% contribution of consumer spending rose reflects the government shutdown, and other temporary factors. Recent earnings calls with Bank executives, though, suggest strong consumer spending.
While the S&P closed last week at new all-time highs (and the equally-weighted S&P is right on the doorstep also), there are some corners of the market that are consolidating. Semiconductors and Industrials, for example, are both pausing after strong runs (+49% and +31% since the lows) – we suspect these pullbacks are likely to prove buyable. Conversely, small-caps are actually showing some signs of life (the Russell 2000 is on the verge of breaking out), Autos are right on the cusp of fresh relative highs vs. the S&P (and are strong globally), and even the Bank stocks are quietly firming despite bond yields still anchored. The European Banks continue to evidence some improvement as well.
So far, approximately 38% of companies in the S&P 500® have reported quarterly results: overall earnings, while falling 2.8%, are somewhat better than the early projection (-4.2%) at the end of March. Many companies cited trade, weather, the government shutdown, and company-specific events for their disappointing results. And yet, a diverse group of companies such as Lockheed Martin, Microsoft, Facebook, Ford, and Capital One Financial posted stronger-than-expected revenues and earnings. Company commentaries have generally been positive with many expecting improving performance as the year progresses. While uncertainties over trade remain, many expect the parties to reach an agreement. Indeed, recent comments by President Xi stress the country’s actions to become a more open economy, an important element in the trade talks. Negotiations are set to resume in China next week.
Last Monday, President Trump announced that the Administration will not extend waivers to countries seeking to import Iranian oil. OPEC has indicated that, in closely monitoring supply and demand, it will take steps as necessary to offset supply disruptions related to the embargo. Oil services companies are reporting increased activity in offshore drilling; their contribution could help stabilize oil prices.
Earnings announcements and growth expectations will likely provide market momentum for the near term. Corporate initiatives undertaken as a result of tax reform are beginning to contribute meaningfully to revenue and earnings results. The markets’ bias remains bullish especially with the recent results of the S&P 500®.
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.
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