Market Beat: Looking ahead to the third quarter
July 12, 2018
Now that the second quarter is over with, it's a good time to look ahead to estimate what we may expect from the third quarter and the rest of the year.
Earnings reporting for the second quarter will get underway next week and the results should be good. Corporate profits have risen about 17 percent over the last year and the second quarter results should be strong as well. One reason that the S&P earnings have been so strong is due to the effect of the Tax Cuts and Jobs Act. If you look at the earnings on a pre-tax basis, the increase was in the 6-7 percent range. Corporate taxes were reduced from 35 percent to 21 percent and a lot of that impact on earnings is behind us now.
The GDP or Gross Domestic Product has been the best in several years, since at least 2014. It's probable that GDP for the second quarter will approach 4 percent. The labor market has been very strong with 213,000 jobs created last month and the U-3 unemployment rate at 4 percent. Wages have been rising at about 3 percent and retail sales have been solid. The unemployment rates in the U.S. haven't been this good since the 1960s. Some foreign countries like Japan and the European nations also have unemployment rates near modern record low levels.
Short-term interest rates have been rising, due to Fed tightening, but long-term rates have not been and as a result, the yield curve has been flattening. The Fed has raised rates seven times in the last couple of years and is expected to continue raising them for the next year or so. Occasionally, the yield curve will invert, and inverted yield curves frequently have preceded economic recessions. The yield curve has inverted prior to 10 of the last 13 recessions. An inverted yield curve means that short term interest rates are higher than long term interest rates.
Inflation as measured by the CPI or Consumer Price Index has been rising over 2 percent. The Fed has a target rate of 2 percent for inflation, so anything over the 2 percent threshold will lead them to continue raising the Fed funds rate.
Gasoline prices have been rising and that will have an impact on consumers. The possibility of some type of trade war developing is real and we'll have to wait and see how that plays out.
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Kenneth Roberts is a Truckee-based Registered Investment Advisor. Information is at his blog at http://www.sellacalloption.com or 775-657-8065. The mention of securities should not be considered an offer to sell or solicitation to buy investments mentioned. Consult your investment professional to understand the risks and/or how the purchase or sale of these investments may be implemented to meet your investment goals. Past performance is no guarantee of future results.
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