Market Perspective for July 27, 2018

The now $20-trillion U.S. economy grew at a 4.1-percent annualized pace in the second quarter, in line with forecasts. Personal consumption rose 4 percent.

Exports were responsible for 1 percentage point, or roughly 25 percent of growth. Economists believe this boost was temporary, caused by foreign importers rushing to buy ahead of tariffs. Third-quarter GDP may be in the 3 percent range if this is the case.

Nominal GDP increased by 7.4 percent, up 3.1 percent from the first quarter, and was largely overlooked by the press, but represents an important data point.  If interest rates remain low and nominal growth remains high, the total U.S. government debt outstanding will fall as a percentage of GDP.

Flash manufacturing PMIs for July showed a steady rate of expansion. Existing home sales hit forecasts at 5.38 million (annualized). New home sales missed estimates at an annualized pace of 631,000, in the mid-range of the expansion trend that started in 2010. Initial claims for unemployment were 217,000.

Earnings season was positive this week but featured high-profile misses. Facebook (FB) and Twitter (TWTR) both fell more than 10 percent after reporting slower user growth. Netflix (NFLX) shares are still down about 10 percent after reporting slowed subscriber growth two weeks ago.

There also was a significant rotation out of growth and into value shares this week. Financials, industrials and energy were the week’s strongest sectors. Airlines extended the transportation sector’s rise. Boeing (BA) and Caterpillar (CAT) both rallied on the week. J.P. Morgan (JPM), Bank of America (BAC) and Citigroup (C) also outperformed. The Dow Jones Industrial Average more than doubled the return of the S&P 500 Index on the week, while the Nasdaq and Russell 2000 both pulled backed from recent highs.

The U.S. dollar rallied this week after the European Central Bank reported rate hikes aren’t likely until after the summer of 2019. The spread between U.S. and German 10-year government bonds approached 30-year highs. Emerging markets outperformed as well. The Chinese government announced a small stimulus plan and measures designed to increase banks’ lending capacity. The news bolstered Chinese stocks but sent the yuan to a new 52-week low.



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