Investment Insights: GDP, some like it hot!

Wade Balliet
Posted by Wade Balliet
Investment Strategy

This weekly report presents insights from our Global Investment Management team.

Continued optimism in earnings and a sizzling GDP growth number in the U.S. have urged domestic stock markets even higher.

Crowd sitting in urban public park at lunchtime in the sun.After gaining almost 4% in July, the S&P 500 has wavered in the latter part of the month due to some key companies disappointing investors; however, the gauge is nearing its all-time high from January this year. Facebook, Twitter, and others saw significant declines after their earnings calls, despite beating earnings estimates. Even though a few name brands have fallen, most companies are still performing well. Of the 325 companies that have reported so far, close to 90% have beaten earnings estimates, and the group remains on track to grow profits by around 24% over last quarter, according to data aggregated by Bloomberg. On top of a robust earnings season, the U.S. saw one of its strongest quarterly growth numbers in recent history.

The Commerce Department reported that the U.S. economy grew at a 4.1% pace in the second quarter, a notable acceleration from the 2.2% growth in the first quarter and the fastest rate since 2014. While President Trump has called the tempo “very sustainable” and Treasury Secretary Steve Mnuchin told Fox News that, “…we definitely are in a period of four or five years of sustained 3% growth at least,” investors and economists don’t seem to be as optimistic. The combination of fading positive effects from tax cuts, increasing risks from tariffs and global trade, a stronger U.S. dollar, and rising rates from the Fed may end up weighing on growth going forward. However, the Trump administration is continuing to do everything in its power to keep the party going. The Treasury Department is considering a $100B tax cut via adjusting capital gains taxes for inflation, according to reports from the New York Times, which will likely benefit the wealthiest taxpayers.

Additional fiscal policy changes to help boost growth are something the Federal Reserve will need to watch closely to ensure the economy doesn’t overheat. The Fed will conclude its two-day meeting today, checking off one of its last policy meetings for the year. According to Bloomberg’s fed funds futures data, the market is still expecting two more rate hikes this year, with an 88% probability of a hike at the September meeting. The Bank of Japan confirmed it will maintain its post-crisis easy monetary policy, but has added a few tweaks to longer term rate goals, and the Bank of England is projected to raise rates at its meeting on Thursday.

Geopolitical risk seems to be waning, at least in the eyes of investors. The Twitter feeds and public declarations between the U.S. and China on additional tariffs have quieted down but remain a notable risk. Our team continues to be optimistic toward the prospect of negotiation between the U.S. and its trading partners. Separately, we see a growing risk in emerging markets as the U.S. dollar strengthens and China’s growth may be showing signs of further slowing. For now, we are enjoying the robust economic and financial data over the near term, but have acknowledged it may not be sustainable.

Chart showing various market returns as of 7/31/18
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