Market Pulse: Still a mixed bag
May 5, 2017
Will the economy improve in a business-friendly environment, or not? Stock investors are voting "yes" despite last week's gross domestic product (GDP) release showing 0.7 percent annualized growth, the worst quarter in three years.
At the same time, two-thirds of business economists expect a rebound in the second quarter and growth over the next four quarters of 2 to 3 percent. For stock investors, it had better happen or else.
Bond investors are less optimistic. They see the weak GDP and the news for autos, manufacturing output, orders for durable goods, retail sales, and housing starts has been at best unimpressive. The financial futures market anticipates one more rate boost this year and only a slight chance of a second one — never mind what the Federal Reserve says. The yield on the 10-year Treasury has fallen to 2.33 percent from more than 2.70 percent.
With both positives and negatives it's no wonder the stock market has, with the exception of a few technology stocks, been drifting. Still, money has to go somewhere and stocks look better than the alternatives.
My view is that tax cuts will boost the economy, profits, and stock prices. Voters like lower taxes and value that over deficit projections and Congressional Budget Office (CBO) analysis. Corporate taxes need to fall and our tax code should be simplified.
Earnings are also boosting stock prices. Earnings reports are coming out every day and there are mostly positive surprises, including from Dow Industrial stocks United Technologies, 3M Company, Boeing, McDonald's, and Caterpillar.
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The first-quarter's S&P earnings are expected to rise 11.2 percent. That's impressive, considering the economy's weakness. Earnings growth is the mother's milk of the bull market. It needn't be at a double-digit pace, which cannot possibly be sustained, but there needs to be growth.
One has to be impressed with how well corporate America is doing in a lackluster economy. Cost cutting helps and so do share buybacks, but up to a point. Economic growth needs to pick up. The business- and investor-friendly environment will help.
The pieces are falling into place, and according to Goldman Sachs it's happening worldwide. They see global growth this year topping 4 percent, twice last year's pace. Good news, because we can't be the island of economic growth. Despite all the nationalistic talk, it's a global economy. The picture is improving.
David Vomund is an Incline Village-based fee-only money manager. Information is found ator 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.