Markets experienced a push-and-pull last week between data indicating strong economic growth and lagging performance from several tech stocks’ earnings reports. Domestic indexes had mixed results, as the S&P 500 gained 0.61%, the Dow was up 1.57%, and the NASDAQ dropped 1.06%. International stocks in the MSCI EAFE had more of an uptick, gaining 1.32% for the week.
The big news last week was the 20% drops for both Facebook and Twitter. The entire tech sector seemed to catch a cold last week. But here’s a little perspective:
Facebook and Twitter had been on phenomenal runs for the year (with Twitter nearly doubling). Both companies are reinventing their privacy rules. Both companies are also taking on the ‘fake news’ problem. In short, both companies are modifying their business models — and the impact is significant enough to warrant a re-evaluation by analysts. This appears to be what the markets have done – re-evaluated pricing and adjusted down for the short-term as these giants figure out how to deal with these new challenges. I believe this is short term noise and will ultimately be a bump in the road five years from now.
Does this contagion spill over to the entire market? A little… particularly because Facebook has grown to a point that it has a material impact on indexes as I’ve mentioned in this newsletter over the past several weeks. Does it indicate a systemic problem? Probably not (but we’ll see).
From a technical perspective, the major indexes were still pretty high. The S&P 500 was reaching over-bought territory again heading into its fourth week in a row of gains.
So now what?
It looks like the S&P 500 has backed off from its over-bought status. Now some key levels will be tested. Look for the trading range of 2800 on the low, and 2850 on the high, to be tested this week.
There are a lot of big names to report earnings this week. If the profit numbers are solid, we probably see this market grind higher. It’s still fighting a fair amount of political headline risk, but the overall backdrop is still stock-favorable.
On Friday, July 27, we received the initial reading of 2nd quarter Gross Domestic Product (GDP). The report indicated that the economy grew at a 4.1% annual rate between April and June. This reading was the fastest pace in almost 4 years and significantly higher than 1st quarter growth. Markets, however, had a relatively mild reaction to the GDP data due to rumors predicting even higher results. The average of the past 4 quarters is now 3.1% which is probably a more realistic picture of the current growth.
Let’s dig beyond the headline GDP growth number to see what else it tells us about our current economic circumstances.
2nd Quarter GDP Details
• The tax cut helped drive growth
The recent $1.5 trillion tax cut contributed to the latest GDP performance. Both consumers and businesses spent more in the 2nd quarter. Some economists believe this result will not last; without further tax cuts, consumers and companies won’t have additional funds at their disposal.
• Trade tension affected GDP
This year’s ongoing trade drama impacted the economy during the 2nd quarter, but perhaps not the way you might expect. Many soybean farmers tried to get ahead of coming tariffs by shipping their crops to China earlier than normal. This move helped GDP increase between April and June.
• Inflation slowed
When examining inflation, the Fed uses the personal consumption expenditures (PCE) without food and energy, also known as the core PCE. The 2nd quarter reading was 2%, down from 2.2%. Between healthy economic growth and solid inflation numbers, the Fed is likely still on track for two more rate hikes in 2018.
Seeing strong growth this late in an economic expansion is good news. However, now we will have to see whether the growth can continue at this rate. When discussing the GDP readings, President Trump predicted even better results in future quarters. Some economists, on the other hand, believe trade wars and consumer spending could provide headwinds.
We can’t predict the future, but we do know that economic fundamentals continue to be strong. This week, we will receive a number of new readings from manufacturing to employment to motor vehicle sales and earnings season will roll on.
In my opinion, the biggest risk to our economy and stock market is the rhetoric and partisanship and coming out of Washington. I don’t normally use this newsletter as any political platform and being a business owner in the investment industry I am fairly conservative politically. I am thankful for the recent tax cuts while I worry about the long-term fiscal responsibility of kicking the can down the road to future generations. I’m also thankful the current administration has a backbone in dealing with many of the issues facing this country. However, I can’t help but compare President Trump to the king in the children’s book “The Emperor’s New Clothes” when it comes to his overall statesmanship and representation of the people of the USA.
If you would like to discuss any of these details and how they may impact you, we’re ready to help.
Tuesday: Personal Income and Outlays, Consumer Confidence
Wednesday: Motor Vehicle Sales, ADP Employment Report, PMI Manufacturing Index, ISM Mfg Index
Thursday: Factory Orders, Jobless Claims
Friday: Employment Situation, International Trade, PMI Services Index, ISM Non-Mfg Index
This week in history:
On this day in 1965, President Lyndon B. Johnson signs Medicare, a health insurance program for elderly Americans, into law. At the bill-signing ceremony, which took place at the Truman Library in Independence, Missouri, former President Harry Truman was enrolled as Medicare’s first beneficiary and received the first Medicare card.
Quote of the week:
“Let no feeling of discouragement prey upon you,
and in the end you are sure to succeed.”
— Abraham Lincoln
PUBLISHED BY NICK TOADVINE