Economic Data Under President Trump – Weekly Update for January 23, 2017

A new presidential era began last Friday with Donald Trump’s inauguration, and the market reaction was far more restrained than its response to his election. For weeks after the presidential election, we saw markets defy expectations and post significant gains. In fact, the Dow grew by over 1,500 points between November 8 and December 12.

In the four days of trading last week, major U.S. indexes continued the sideways performance we’ve seen since December. For the week, the S&P 500 was down 0.15%, the Dow lost 0.29%, and the NASDAQ gave back 0.34%. International stocks in the MSCI EAFE also declined by 0.48%.

Despite these weekly losses, Friday’s market performance marked one milestone not seen since John F. Kennedy’s election: index gains on inauguration day. Nonetheless, we still see a market that has been in a holding pattern for weeks. The S&P 500 has barely moved since the day before the Fed raised rates on December 14. If you analyze this graph of the Dow’s performance, you see a similar scenario – the index grew sharply after the election, but the red box shows performance stalling since December.

Why has the Trump Bump paused?

The markets are incredibly complex and multifaceted, so one answer cannot fully explain their performance. However, after rallying in anticipation of Trump’s promises for lower taxes, decreased regulation, and increased government spending, investors are now waiting to see which policies will come to fruition. No one knows for sure what policy changes or political developments lay ahead. We must look closely at fundamentals to see beyond the headlines and find a clearer view of where the U.S. economy stands today.

What are the fundamentals telling us?

During the current corporate earnings season, 63 companies have reported their fourth-quarter results so far. Of these companies, 63% beat earnings-per-share estimates and 46% exceeded their sales estimates.

Last week, we also saw:

This week, three factors will give us a deeper view of economic performance: 1) fourth-quarter GDP reports, 2) consumer sentiment data, and 3) home sales figures. By analyzing data rather than focusing on hype and predictions, we remain committed to your long-term financial health.

What should you focus on?

No matter your political perspectives, moments of change can elicit emotional reactions from even the most rational investors. As always, emotions have no place in investing.

Consider this: After President Obama’s election in 2008, the S&P 500 dropped 15.5% by inauguration day, as his transition period coincided with the deepening financial crisis. Investors who allowed emotions to take over at that point and left the markets could have missed the S&P 500’s 12% average annual growth each year Obama was in office.

We believe now is the time to continue focusing on your unique risk tolerance, your long-term goals, and the economic fundamentals, not who is in office.

We will continue to monitor economic and market evolution as it occurs, and we will closely watch the political division that seems to grip our country. In the meantime, we are here to answer any questions you may have and help you find the clarity you need.

ECONOMIC CALENDAR:

Tuesday: Existing Home Sales

Thursday: New Home Sales, International Trade in Goods

Friday: GDP, Durable Goods Orders, Consumer Sentiment

December Earnings & a Presidential Week – Weekly Update for January 17, 2017

2017-01-09 Blog ImageAs we look back on markets last week, we see mixed results with none of the major domestic indexes gaining or losing more than 1%. The S&P 500 was down 0.10% for the week, and the Dow gave back 0.39%, yet again failing to reach 20,000. On the other hand, the NASDAQ increased by 0.96% and reached its sixth record close in 2017 on Friday—pushed by a 1.36% rally for Facebook after Raymond James upgraded its stock. International stocks in the MSCI EAFE added 0.82%.

What We Saw Last Week

Big banks reported earnings. Earnings season is upon us. On Friday, we saw JPMorgan Chase, Bank of America, and PNC Financial beat profit expectations. These positive results add some weight to the post-election financials rally, where financial-sector equities in the S&P 500 have added 17% since the election. A number of other banks will report this week, and we will look to see if their performance also matches the growth we have seen so far.

Retail sales grew. The December monthly retail sales report showed a 0.6% increase, slightly below the 0.7% consensus expectations. With this growth, retail sales are now up 4.1% in the past year. However, not all retailers are performing well. General merchandise stores are suffering as consumers continue to shop online and move away from in-person retail stores. We see the results of this trend in declining retails sales numbers and large companies announcing store closures, including Macy’s, Sears, CVS, and many more.

Consumer sentiment was high but divided. The University of Michigan’s monthly report on consumer sentiment was 98.1, just below predictions but still near highs we have not seen since 2004. One interesting finding in the report is a strong partisan divide in consumer confidence. Richard Curtin, director of the consumer survey, described “extreme differences” between people’s expectations for whether new political policies would help or hurt the economy. He reminded people that the most impact on consumer sentiment will come from “actual changes in the economy” as a result of Trump’s work, which we will have to wait a few months to see.

What We’re Looking at in the Week Ahead

Earnings season continues. The markets will be watching earnings closely during this four-day trading week—specifically to see if other major financial institutions also beat expectations. Some analysts believe that to keep the current market rally going and demonstrate that there is weight behind the post-election growth, we’ll need to see excellent reports from most companies.

A number of high-profile companies report this week, including:

  • Morgan Stanley
  • Goldman Sachs
  • Citigroup
  • American Express
  • Netflix
  • IBM
  • UnitedHealth Group
  • General Electric Co.

Donald Trump becomes President. While earnings reports will be important to track, another event looms larger in many people’s minds: Donald Trump’s inauguration. After he takes the oath of office Friday morning and becomes President of the United States, we will begin to see how the market’s expectations for Trump’s policies match reality.

From trade to taxes to infrastructure and beyond, the next few months will give us a number of insights into how U.S. policies may change. Uncertainty remains, and we will watch for political developments that may affect the markets. In addition, we will continue to focus on the fundamentals that provide deep insight into how the economy is performing—and how we can strive to keep you on track toward your goals.

ECONOMIC CALENDAR:

Monday: U.S. Markets Closed in Observance of Martin Luther King, Jr. Day
Wednesday: Consumer Price Index, Industrial Production, Housing Market Index
Thursday: Housing Starts

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New Year, New Market Highs – Weekly Update for January 9, 2017

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The first trading week of 2017 is over, and during this time, all three major domestic indexes hit record highs. The DOW reached 19,999.63 in intra-day trading on Friday, January 6 —just 0.37 away from achieving 20,000 for the first time. On the same day, the S&P 500 and NASDAQ both closed at record highs. For the week, the S&P 500 was up 1.70%, the Dow gained 1.02%, and the NASDAQ added 2.56%. International stocks in the MSCI EAFE increased by 1.77%.

To say that 2017 has started differently than 2016 would be an understatement. This time last year, we ended the week with all three indexes dropping at least 5.96% on fears about China’s economy.

What else happened last week?

In addition to record highs in the markets, we received a number of economic reports, which provided a mix of positive and less-than-ideal data.

Jobs Grew, But Missed Projection: The Bureau of Labor Statistics reported that U.S. employers added an estimated 156,000 non-farm jobs in December. This number missed economists’ projections of 178,000 new jobs but also marked the 75th straight month of job growth.

Unemployment Increased: The percentage of individuals actively seeking jobs in the U.S. increased by 0.1% in December, meeting expectations that it would reach 4.7%.

Wages Grew: One bright spot in this week’s labor report was a 0.4% increase in average hourly earnings. After sluggish growth through much of the economic recovery, wages increased by 2.9% in 2016.

Trade Deficit Increased: In November, U.S. exports declined as our imports grew, pushing the trade deficit to a nine-month high. The inflation-adjusted trade deficit is now $3.2 billion bigger than a year ago, an increase that could deflate Gross Domestic Product for the fourth quarter of 2016.

Manufacturing Hit Two-Year High: For the fourth consecutive month, the ISM manufacturing index showed growth in the manufacturing industry. December’s reading of 54.7 beat expectations.

Services Sector Beat Expectations: The ISM non-manufacturing index, which surveys economic data from executives in 60 service sectors, grew for the 83rd straight month. December’s measure of 57.2 matched November’s reading and beat economists’ predictions of a drop to 56.6.

Overall, beginning a new year with record highs in the markets is encouraging for all of us as investors. Many of the fundamentals seem to point to an economy that is picking up speed—but only time will tell how our new presidential administration’s policies will affect us in the future.

We hope to see continued growth and stability, and no matter what lies ahead, we will be here to guide you toward the goals and priorities that matter most to you.

ECONOMIC CALENDAR:

Monday: Labor Market Conditions Index, Consumer Credit

Tuesday: JOLTS

Thursday: Import and Export Prices

Friday: PPI-FD, Retail Sales, Consumer Sentiment

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What Does Year-End Hold For Our Strengthening Economy? – Weekly Update for November 21, 2016

interest-rates-could-riseFor the second straight week, the major domestic indexes all ended in positive territory: The S&P 500 was up 0.81%, the Dow increased 0.11%, and the NASDAQ added 1.61%. While American indexes performed well, MSCI EAFE’s international equities declined 1.58%.

With the long, drawn-out presidential election behind us, investors are beginning to look past politics and pay closer attention to the economic fundamentals. As we’ve shared in recent market updates, the economy shows many signs of strength and growth. In the past few weeks alone:

Of course, the economy is far from perfect — and growth is still slower than we’d like — but the overarching message is that the economy is doing well.

Thus, we were not surprised this week when Federal Reserve Chair Janet Yellen said an interest rate hike “could well become appropriate relatively soon.” Despite what talking heads might warn on television, you should not be afraid of increasing interest rates.

The last increase, which took place in December 2015, may have contributed to the volatility we experienced at the beginning of this year. However, the markets have certainly recovered from their momentary stumble — with all major domestic indexes posting at least 6% increases year to date.

Volatility could increase for a short time after the next interest rate increase, but it also may not. Right now, we see the markets reacting positively despite a 90% chance of the Fed increasing rates next month.

In other words, we believe investors are seeing a potential rate increase as the good news that it is, because it indicates faith in our economy. When Yellen and the Fed decide to raise rates, they are demonstrating belief that the economy is strong enough to move back toward historically normal levels.

We’ve become so accustomed to this post-recession rate world that it’s easy to forget just how unusually low our current 0.5% rate is. Even if we move to 0.75% next month, borrowing money is still incredibly inexpensive, and we have additional room for future increases.

We are heartened to see the economy continue to grow, and President-Elect Trump’s policies may quicken the pace beyond what we’ve experienced in the recovery so far. Of course, as we’ve seen many times this year, a likely outcome isn’t the same as a guaranteed one, so we’ll have to wait and see what the Fed decides in December.

In the meantime, we encourage you to look beyond pundits’ histrionics and headlines to see that our economy is strengthening. We are here to help you make the most of it.

ECONOMIC CALENDAR:

Tuesday: Existing Home Sales
Wednesday: Durable Goods Orders, New Home Sales, Consumer Sentiment
Thursday: Markets Closed for Thanksgiving
Friday: International Trade in Goods

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President Trump and Your Investments – Weekly Update for November 14, 2016

how-will-markets-performLast Tuesday, many Americans watched in great surprise as Donald Trump won our presidential election. Just that day, the New York Times had placed Hillary Clinton’s odds of winning at 85%, based on a range of state and national polls. But, like the Brexit vote this past June, 2016 seems to be the year of unexpected outcomes.

As predicted, the markets initially reacted to uncertainty as they often do: with losses. Futures for the Dow, NASDAQ, and S&P 500 all dropped at least 4% in the middle of the night after Trump’s win. But come Wednesday morning, everyone was in for another surprise.

Despite many predictions that the markets would sell-off if Trump won, all of the major U.S. indexes ended the week ahead. The S&P 500 was up 3.80%, the Dow gained 5.36%, NASDAQ increased 3.78%, and MSCI EAFE added 0.05%. The Dow closed at an all-time high on Thursday and posted its best week since 2011, despite being slightly down on Friday. Even today, the Dow reached a new record high.

Needless to say, these developments last week gave significant surprises for most people. Let’s look a bit deeper at the market’s reaction and what may lie ahead.

Understanding the Rally

The markets hate uncertainty, but they love economic growth. After Trump’s win, investors saw potential for decreased corporate tax rates, individual income taxes, and government regulation—plus increased infrastructure spending. All of these changes could help drive economic growth.

When you look at which sectors outperformed, you can see who investors believe may benefit from a Trump presidency:

  • Biotech jumped nearly 16% on expectations that Trump may not fight price increases as Clinton would have.
  • Financials increased 11.33%, because increasing interest rates, deregulation, and infrastructure projects would serve them well.
  • Industrials were up 7.96%, which would benefit from infrastructure projects.

Looking Beyond Stocks

While the major markets posted impressive gains, gold had its worst week in three years, losing roughly 6.2%.

But why?

A multitude of reasons come into play, but one stands out most clearly: If Trump is able to hold to his promise of $1 trillion in infrastructure spending, inflation will likely pick up and the Federal Reserve could significantly increase interest rates during that time. As a result, gold’s appeal would lessen as other investments offer a more attractive income yield.

What Might Be Ahead?

Right now, the election is fresh on everyone’s minds and directly affecting the markets. But like all major events, another one will eventually capture our attention. As we stand now, the fundamentals tell us that the economy is performing well. Unemployment is at only 4.9%, hourly earnings are rising, and GDP is growing. Thus, there is a good chance that the next big event on the financial horizon is a Federal Reserve interest rate increase in December.

If the Fed does choose to increase rates, we may see additional volatility in the short-run—but the underlying data shows us that the economy is fundamentally strong.

A Long-Term Focus

Seeing last week’s market performance might make you want to find even more ways to capture growth. Remember—just as in down cycles—emotion has no place in investing. We are here to help guide you through these tumultuous times and keep a tireless focus on achieving your long-term goals.

The markets and our political environment may be full of surprises, but our goal is to make your financial life as peaceful and comfortable as possible.

ECONOMIC CALENDAR:

Tuesday: Retail Sales
Wednesday: Industrial Production
Thursday: Consumer Price Index, Housing Starts
Friday: Leading Indicators

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Stay the Course: Choosing Confidence in an Uncertain Market – Weekly Update for November 7, 2016

2016-11-07-blog-pictureWe’re in the middle of an interesting moment for the markets, where short-term volatility and uncertainty might lead you to believe that the economy is faltering. After all, the major stock indexes lost ground last week, with the S&P 500 losing 1.94%, the Dow dropping 1.50%, the NASDAQ dipping 2.77%, and the MSCI EAFE declining 1.59%. On top of these losses, the S&P 500 posted its longest losing streak since 1980.

Of course, we never like to see the markets go down. However, we believe that when you look beneath the surface, the economy is still doing far better than what this week’s performance implies. Behind the losses and ongoing election exhaustion, we see a number of strong indicators that the economy is growing. This week, we learned that the trade deficit shrank, the service sector grew for the 81st consecutive month, and manufacturing continued its steady growth.

On Friday, November 4, we also got to see new data on jobs and payrolls — the last significant economic report before Election Day.

What did the jobs report show us?

  • Unemployment Rate Dropped

The unemployment rate hit 4.9%—only 0.1% above the Federal Reserve’s target unemployment rate.

  • Economy Added 161,000 Jobs

While this job creation rate was below economists’ predictions, we don’t think it is cause for concern. The growth was matched by revised August and September reports that added another 44,000 jobs.

  • Hourly Earnings Increased

Earnings increased by 0.4%, pushing them 2.8% higher than this time last year. We haven’t seen an earnings increase this large since 2009.

  • People Left Their Jobs at Higher Rates

Last month showed the highest number of people who voluntarily left their jobs since 2007. This statistic matters because it can show that people are more confident they’ll be able to find new jobs.

Our Takeaway

For years, this plow horse economy has been adding new jobs at a slow and steady pace. Now that we’ve almost reached the benchmark unemployment rate, people are finally starting to see their wages increase and new opportunities arise. Typically, better jobs mean more disposable income, which equals increased consumer spending—and economic growth.

The rest of 2016 might not be a smooth ride, as the election and potential interest rate increase remain on investors’ minds. We hope you find comfort knowing that beneath this short-term volatility, we see growing economic strength.

 

ECONOMIC CALENDAR:

Monday: Gallup U.S. Consumer Spending Measure, Consumer Credit

Tuesday: U.S. Presidential Election

Wednesday: Wholesale Trade, EIA Petroleum Status Report

Thursday: Treasury Budget

Friday: Banks Closed but Markets Open, Consumer Sentiment

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How Did Big Headlines Influence the Market? – Weekly Update for October 31, 2016

2016-10-31-blog-pictureAt first glance, last week’s headlines may lead you to think that the markets are fluctuating more than they actually are. Yes, Hillary Clinton’s emails are in the news again (more on that below)—but despite that surprise, the major indexes stuck to the same range-bound performance we’ve seen for the past three months. The S&P 500 ended down 0.69%, the NASDAQ was off 1.28%, and MSCI EAFE lost 0.44%. The Dow Jones Industrial Index eked out a 0.09% increase.

Three Key Events Last Week

  1. FBI Announces Renewed Look at Hillary Clinton’s Emails 

What happened?

On Friday, October 28, FBI Director James Comey sent a letter to Congress alerting them that the agency would be reviewing new Hillary Clinton emails discovered during their investigation of former Congressman Anthony Weiner. When news of Comey’s letter broke, the major indexes responded quickly—and negatively. For example, the Dow, which had been up 75 points, reacted with a nearly 150-point swing before closing about 10 points lower.

 What does this mean?

The announcement threw a wrench in an already contentious and exhausting presidential race. Recently, polls showed that Clinton held a solid lead over Trump, and the markets had priced in her win. But Friday’s news calls this assumption into question, creating greater uncertainty for the next two weeks.

If there’s one thing the markets hate, it’s uncertainty. And while big headlines rarely affect long-term performance, the markets may react to them in the short run. We expect this story to stay in the news through Election Day—a day we’re pretty sure every American is ready to move past.

  1. Gross Domestic Product (GDP) Has Biggest Gain in Two Years

 What happened?

On Friday, the government announced that GDP — essentially, the economy’s scorecard—had 2.9% growth, beating the expectations of 2.5%. Not only is this rate the best we’ve seen in two years, but it also shows far faster economic expansion than the first two quarters of 2016, when U.S. growth averaged just over 1%.

What does this mean?

The economy is growing faster than experts thought, which makes a December interest-rate increase more likely. On Friday, traders showed an 83% likelihood that the Federal Reserve would raise rates at their last meeting of the year.

Keep in mind that if the Fed raises rates, they wouldn’t be doing so to temper the economy’s growth. Instead, they would be using this positive GDP report as further evidence that the economy is strong enough to handle a move toward more normal interest rates.

  1. Durable Goods Orders Decline

What happened?

After gaining 0.3% in August and 3.6% in July, durable goods orders dipped 0.1% in September. Broadly, durable goods are items that last for more than three years—from a toaster to a tractor — and orders for them help us measure business investment. September orders lowered in a number of categories, including an 8.6% drop in orders for computers.

What does this mean?

The drop in durable goods orders is less concerning than it may seem on first glance. Between a strong dollar making U.S. exports more expensive and low oil prices leading energy companies to cut spending, large manufacturing companies have often had to cut their budgets. However, many economists believe these factors should be lessening, which can allow durable goods spending to rebound.

 

ECONOMIC CALENDAR:

Monday: Personal Income and Outlays

Tuesday: Motor Vehicles Sales, FOMC Meeting Begins, PMI Manufacturing Index, ISM Mfg Index, Construction Index

Wednesday: ADP Employment Report

Thursday: Jobless Claims, Productivity and Costs, Factory Orders, PMI Services Index, ISM Non-Mfg Index

Friday: Employment Situation, International Trade

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All Quiet on the Market’s Front – Weekly Update for October 24, 2016

blog-10-24-16After a two-week losing streak, U.S. indexes ended last week in positive territory across the board. The S&P 500 increased by 0.38%, the Dow was up 0.04%, and the NASDAQ gained 0.83%. The MSCI EAFE, a measure of international developed nations’ performance, increased 0.93%.

Of course, seeing positive weekly results is always good, but right now, the general market sentiment seems unsure about where it stands and where to go from here.

Why did the markets have a sluggish week?

Experts last week described the markets as lazy and docile — and we have to agree. If these five days of trading were made into a movie, it would probably put a lot of people to sleep.

On paper, last week seemed to provide plenty of opportunities for market excitement — from major companies’ earnings releases to the European Central Bank’s latest policy announcement. In reality, however, much of what we saw and heard led to little change and few strong reactions.

But why?

We’d point to a few key occurrences:

  1. Earnings reports were mostly good, but few were outstanding.
  2. The European Central Bank held interest rates where they are.
  3. The presidential election continues to hold the markets in limbo.

While last week’s markets seemed more sluggish than normal, a little break from the excitement can be nice sometimes — especially when coupled with increases across all major U.S. indexes.

Looking Ahead

This week not only moves us ever closer to Election Day, but it also brings more earnings reports and ends with a key update on Friday: Gross Domestic Product. GDP gives us insight into how the economy is performing and where we stand with inflation.

ECONOMIC CALENDAR:

Tuesday: Consumer Confidence, State Street Investor Confidence Index

Wednesday: New Home Sales

Thursday: U.S. Durable Goods Orders

Friday: GDP, Consumer Sentiment

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HEADLINES:

U.S. Dollar Surges: The U.S Dollar hit a seven-month high, rising 0.37% compared to a group of currencies. Right now, the exchange between the Dollar and Euro is at $1.088.

Microsoft Reaches All-Time High: After releasing an expectations-beating earnings report, Microsoft’s stock prices grew — and on Friday they closed higher than their previous record, set in 1999.

Volatility Lowers: The CBOE Volatility Index (VIX), which measures fear and volatility in the markets, fell to 13.4.

Earnings Drive Record High Close – Weekly Update for August 15, 2016

Earnings Drive Record High Close - Weekly Update for August 15, 2016

Stocks rallied late last week as the S&P 500, Dow, and NASDAQ all closed at record highs on Thursday for the first time since New Year’s Eve 1999. The NASDAQ also notched a seventh week of gains, its longest winning streak since 2012. For the week, the S&P 500 gained 0.05%, the Dow grew 0.18%, the NASDAQ added 0.23%, and the MSCI EAFE grew 2.73%.

Earnings season is mostly behind us, and, with nearly all of the S&P 500 companies having reported in, we have a good overall picture of last quarter’s performance. Total earnings for the index so far were down 3.7% on -0.7% lower revenues relative to Q2 2015. However, 71.1% have managed to beat profit expectations, which has given stocks a boost in recent weeks.

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Here’s what we can take away from the second quarter:

Though earnings growth is still negative, it’s a vast improvement over what we saw in the first quarter from the same group of companies. Results are also better than the 4-quarter moving average. Revenue growth is also negative, showing that many companies are still (seven-plus years into the economic recovery) struggling with slow demand.

The energy sector is still bringing down overall earnings. Excluding Energy, earnings for remaining S&P 500 companies would be slightly up 0.1% on 2.4% higher revenues.

Third quarter earnings growth estimates are steadily coming down, indicating that business leaders are not expecting standout performance. Are companies sandbagging expectations to improve the odds of a positive surprise? That’s highly possible. However, we’re not expecting to see meaningful growth pick up this quarter.

Next week, we’ll get a look at notes from the last Federal Reserve Open Market Committee meeting. We’ll analyze these meeting minutes to get a sense of what the Fed is thinking about the economy and see how different members of the committee are voting. The rest of the week is also full of important economic releases, which could stoke volatility if we see any surprises. When markets experience a sustained rally over a period of weeks, it’s not surprising when investors pause for a breather to reevaluate the data.

Have questions about how all of this data impacts your portfolio as an investor? We’d love to chat with you. Feel free to leave a comment below or reach out to us at hello@hzcapital.com if there is anything you’re curious about. As always, our goal is to make sure you’re informed on the latest economic updates.

ECONOMIC CALENDAR:

Monday: Empire State Manufacturing Survey, Housing Market Index, Treasury International Capital

Tuesday: Consumer Price Index, Housing Starts, Industrial Production

Wednesday: EIA Petroleum Status Report, FOMC Minutes

Thursday: Jobless Claims, Philadelphia Fed Business Outlook Survey

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HEADLINES:

Consumer sentiment increases in August. A measure of American optimism about the economy increased this month, hopefully supporting future consumer spending.

Retail sales remain flat in July. Sales of retail goods remained surprisingly unchanged last month as Americans cut back on purchases, moderating expectations of a surge in consumer spending this quarter.

Business inventories rise slightly in June. Business stockpiles edged higher in June as sales surged, suggesting U.S. firms are having an easier time moving products off shelves.

Job openings edge higher in June. The number of available jobs rose slightly over May, suggesting moderate growth. An increased number of factory job postings could indicate movement in the manufacturing sector.

Q2 GDP Estimate: Present & Future Impact – Weekly Update for August 1, 2016

 

Q2 GDP Estimate: Present & Future Impact - Weekly Update for August 1, 2016

Stocks broke their four-week winning streak, closing mixed after the release of a surprisingly low estimate of second-quarter economic growth. For the week, the S&P 500 lost 0.07%, the Dow fell 0.75%, the NASDAQ grew 1.22%, and the MSCI EAFE added 2.36%.

The preliminary estimate of Q2 Gross Domestic Product (GDP) growth showed that the economy only grew 1.2% last quarter versus the 2.6% growth expected. Investors were understandably disappointed as they had hoped for a resurgence after a slow first quarter, but professional economists were surprised as well. The New York Fed had forecasted GDP growth of 2.1% and the Atlanta Fed had predicted 2.3% growth. Why the shock?

Digging deeper into the data, we find that the disappointment came from an unexpected fall in business inventories. On the positive side, the drop may boost future economic growth as businesses rebuild their stockpiles. Consumer spending was strong, growing 4.2% over the previous 12 months, and accounting for nearly all the GDP growth we saw.

So, though the headline number wasn’t thrilling, the underlying trends in consumer spending, labor market growth, and higher savings rates could set up a banner third and fourth quarter.

During last week’s Federal Open Market Committee meeting, the Federal Reserve’s monetary policy makers voted to hold rates steady, which was not a surprise. Citing recent economic data, the central bank said that “near-term risks to the economic outlook have diminished,” setting the stage for the next rate hike.

Will rates increase in September? December? Or will the Fed wait until 2017? We don’t know. Wall Street bets on future rate hikes suggest that most traders don’t think the Fed will move until December if they don’t wait until 2017.

The good new is the Fed seems confident enough in economic growth to cut back on stimulus. On the other hand, speculation around the timing of future rate hikes will continue to be a major market theme this year and may stoke additional volatility.

This week, investors will be watching Friday’s July labor market release and digesting more corporate earnings reports. We look forward to keeping you informed.

 

ECONOMIC CALENDAR:

Monday: PMI Manufacturing Index, ISM Manufacturing Index, Construction Spending

Tuesday: Motor Vehicle Sales, Personal Income and Outlays

Wednesday: ADP Employment Report, ISM Non-Manufacturing Index, EIA Petroleum Status Report

Thursday: Jobless Claims, Factory Orders

Friday: Employment Situation, International Trade

 

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HEADLINES:

Weekly jobless claims rise. The number of Americans filing claims for new unemployment benefits rose by 14,000, but the underlying trend still shows strength in the labor market.

Consumer sentiment drops in July. A measure of how consumers feel about the U.S. economy slipped as worries about the Brexit and the presidential election weighed on Americans.

June new home sales surge. Sales of new single-family homes rose to the highest levels in nearly 8-1/2 years. Sales were up 25.4% over June 2015, indicating that the housing market may be gaining momentum.

Durable goods plunge in June. Orders for long-lasting manufactured goods dropped, indicating weak overseas demand is affecting U.S. factories. Economists had predicted a 1.4% decline over June, but orders for goods like aircraft, appliances, and machinery actually fell 4.0%.