Economic and Stock Market Commentary for the week of August 7, 2018

Alex Ralicki |

The economy performed as advertised in the second quarter, delivering a 4.1% increase in GDP on strength in consumer spending, exports, and business investment. Such broad improvement more than offset slippage in homebuilding. Supporting this growth were lower taxes, a better trade balance, and a jump in federal government spending tied to the budget deal passed earlier this year by Congress. However,

The recent period is likely to mark the high point for the year, in part, because we do not expect the surge in exports (up 9.3% in the second quarter) to recur. True, the underlying improvement in the economy looks sufficiently strong to keep GDP growing nicely in the second half. Still, the projected rate of growth is likely to be closer to 3% than 4%. Growth may slow to 2.5%, or so, in 2019, as higher interest rates, a likely further moderation in housing, and possible restrictive trade actions start to affect aggregate demand.

Meanwhile, the Federal Reserve appears to be moving towards a more restrictive monetary approach. That’s even as it voted to keep interest rates unchanged at last week’s FOMC meeting. Our sense is that the Fed, in acknowledging the quickening pace of economic activity, the low rate of unemployment, and the steady march of inflation, is growing comfortable with the idea of raising interest rates at its September meeting and then possibly in December. Several additional rate adjustments may follow in 2019, as the bank seeks to have ammunition in reserve for fighting the next business downturn.

Earnings are still forging ahead. Here, as well, the strong second quarter, in which profit growth has eclipsed 20% so far, could prove the high-water mark for this cycle. How quickly things decelerate thereafter will be critical in determining the health of the stock market going forward. For now,

Investors continue to take things in stride, with stocks remaining at elevated levels. Meantime, the market seems to be looking for a catalyst, such as a breakthrough on trade, to drive equity prices higher.

Conclusion: Absent a catalyst, we think this range-bound activity will continue.