Market Pulse: What is the market saying about the economy?
August 9, 2017
Last week, President Trump touted the economy's 2.6 percent growth in the second quarter as "a number that nobody thought they'd see for a long period of time." Should we be excited about that? Not so fast.
Gross Domestic Product (GDP) was higher than 2.6 percent in eight of the last 18 quarters, including the third quarter of 2016. Even so, those were blips and yearly GDP growth was modest at best. Yearly GDP growth hasn't reached 3 percent since 2005.
So is the economy improving? Bond investors don't think so. They are giving up on a tax cut-inspired growth spurt that would put upward pressure on rates this year. Evidence, income vehicles, especially preferred stocks, are at their highs.
The thinking is that the overall Trump agenda may fade as congressional Republicans show that they are tepid at best for Trump's plans for taxes, infrastructure, the economy, and immigration — the works.
Forget sustained growth of 2.5 percent or more. We'll just muddle along with a "1" handle on growth as we have for a decade. The world's currency traders are reaching the same conclusion. Little noticed is that the dollar is lower today than it was on Election Day.
Stock investors have a different take, which is why we've reached new highs. Are they Pollyanna's for whom the glass is always half full? Some perhaps, but most see positives, growth spurt, or no growth spurt.
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One of those positives is the pile of cash accumulating on personal and corporate balance sheets both here and abroad. Another is the impact of S&P earnings on the dollar's fall. Their thinking is that if the bond investors have it right, interest rates will stay low and earnings will grow modestly.
That combination has worked well for years. If the bond buyers are wrong, however, rates will rise along with economic growth, but so will earnings. Over time, stock prices track earnings closely. Seems like a win-win situation.
Speaking of earnings, it's astonishing how well corporate America is doing given slow economic growth and dysfunction in Washington. While the final number is not in, earnings probably grew 15 percent in the second quarter.
Ordinarily, management is optimistic for earnings as the year begins, then they revise the outlook lower as the months roll by. This year the opposite is occurring.
But Wall Street and investors are hard on stocks when earnings come up short of what analysts expected or were led to believe, so it's best for management to set the bar low. If today's guidance is setting the bar low, then CEOs are even more bullish than they're willing to say. Let's hope.
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.