Market Commentary, 07/24/18

Last week, U.S. stocks were roughly flat as the Dow rose 39 points to 25,058 (+0.15%). This week is starting strong with the Dow more-or-less flat yesterday (–14 points) but up 197 today at 25,242.

These are an important few days for the U.S. stock market because most companies will report their second quarter (Apr, May, Jun) earnings this week. By yesterday morning, of the 18% of S&P 500 companies that had reported, 82% reported their 2018 Q2 earnings were up compared to 2017 Q2 (Fox Business news, 07/24/18). Most market watchers agree that for most companies, Q2 earnings will be a very strong (CNN Business News, 07/24/2018).

On Friday (07/27/18) Q2 GDP (Gross Domestic Product, i.e., the monetary value of all finished goods and services produced within a country’s borders in a specific time period) growth will be reported by the U.S. Bureau of Economic Analysis (GDP is what is commonly referred to as, “The Economy”). The adjusted figure for Q1 growth is 2.2% (annualized) but estimates of Q2 are significantly higher. As of six days ago, the Atlanta Fed’s estimate was 4.5% (www.frbatlanta.org; 07/24/2018) and many Wall Street firm’s estimates are over 4% (“U.S. GDP could top 4% in 2nd quarter, economists say,” www.marketwatch.com, 07/24/18).

In a healthy economy – one in which unemployment and inflation are in balance – optimum annual GDP growth is consistent and sustainable and runs 3.5% to 4%, although in a given year, some quarters may be more or less than that. A significant caveat, which I’ve written about many times in past years, is that in advanced nations, when the national debt exceeds 90% of GDP, the debt can become a drag on growth. Last year, U.S. GDP was $19.36 trillion and U.S. debt (12/31/17) was $20.5 trillion (www.usdebtclock.org). How much impact U.S. debt will have long-term growth remains to be seen; at present the economy continues its favorable response to the numerous pro-business actions taken by the Administration and to the December 22, 2017 tax bill.

For example, last week, new claims for unemployment benefits dropped to a 48-year low and continuing claims (i.e., the number of people already receiving unemployment benefits), remained near a multi-decade low. Confidence among home builders remained high as continued buyer demand offset concerns over a global trade war. In June, retail sales rose 0.5% following a huge gain in May, and industrial production rose on a rebound in manufacturing and further increases in mining output (www.usa.gov/federal-agencies/u-s-department-of-commerce).

Regarding the capital markets, fundamental indicators (The Sherman Sheet, July 23, 2018) continue to signal a bull market in Domestic Equities, International Equities, Real Estate and Resources and Materials while fundamentals continue to signal a bear market for Fixed Income securities (bonds).

In summary, we continue to be bullish regarding U.S. stocks but the higher the market climbs, the more our optimism becomes cautious.

Wayne Copelin, CFP®
President, Copelin Financial Advisors, Inc.
514 Brooks Street
Sugar Land, TX 77478
Phone (281) 240-2902
Fax: (281) 240-2856
sugarlandfinancialadvisors.com

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