Economic and Stock Market Commentary for the week of August 14, 2018

Alex Ralicki |

The employment outlook remains generally upbeat. True, job growth did slow in July, with 157,000 positions being added, or 30,000 fewer than forecast. However, the tallies for May and June were revised upward; the jobless rate eased to 3.9%, thus keeping it near a 50-year low; and the labor force participation rate remained at the upper end of its recent range, helping to tamp down wage increases.

Meanwhile, there are potential headwinds to consider. Tariffs are beginning to go into effect, and with wage growth barely exceeding inflation, consumers may start to balk since key purchases would become more costly. Also, increases in both manufacturing and non-manufacturing activity moderated in July; home buyers have encountered higher mortgage rates, which have contributed to a slowing in housing sales; and our trade deficit widened in the latest month, which likely was a consequence of the growing rift with our global trading partners.

Even so, the economy should still press forward nicely in the second half, although it is unlikely the 4.1% surge in GDP enjoyed in the second quarter will be matched in the closing two periods. At this time, we expect growth to edge past 3% in the current term and to hold at 3%, or so, over the final three months. Such prospective gains, along with comments from the Federal Reserve acknowledging the strength of the business upturn, suggest the bank will raise interest rates twice more this year.

Another earnings season has come and gone. And it was a stellar few weeks, for the most part, with about 80% of the companies in the S&P 500 having topped their consensus forecasts for the latest quarter. Here, too, we expect the good news to continue, although the rate of growth is likely to moderate. All the while,

The bulls are maintaining their advantage, with the solid economy and strong earnings continuing to act as counterweights to the intensifying global trade standoff.

Conclusion: We think the bulls will hang in there as the summer winds down and the fall approaches. But the road ahead may be bumpy at times, with possibly slowing earnings growth, trade disputes, and the looming midterm elections likely to keep volatility high.