Economic and Stock Market Commentary for the week of July 19, 2018
The economy was on a roll as the second half began, with much of this strength apparent in the manufacturing and non-manufacturing areas. The gains shown by these broad industrial and consumer categories were especially noteworthy in new orders and production. At the same time, the Labor Department issued a stronger-than-expected jobs report, with the addition of 213,000 positions in June and upward revisions for April and May.
We think the good news can continue. The strong growth of orders in manufacturing and non-manufacturing, the fact that jobless claims are at historically low levels, and the further uptick in personal income suggest that a reasonably solid economic uptrend will remain in place in the second half.
However, there are headwinds out there, and these revolve around the escalating trade war with China following our announcement of possible new tariffs aimed at that economic giant. Persisting trade conflicts with several of our allies, meantime, which are causing businesses to warn of instability, lost sales, and ultimately job losses, suggest that the 4% plus rate of GDP growth likely achieved in the second quarter may not be fully sustainable going forward.
One area of concern is unlikely to be corporate earnings, at least for now, where consensus estimates for the second quarter call for profit growth on the order of 20% for companies in the S&P 500 Index. Here, as well, we look for moderating gains down the stretch of 2018, especially if the trade rift with China intensifies still further or if wage growth exceeds expectations.
On balance, the investment picture remains bright. But just how much of this good news on the economy and earnings already is reflected in the still-elevated level of the stock market is an open question. That is what investors will need to consider as the second half progresses, especially if a possible summer rally raises P/E ratios still further.
Conclusion: Our sense is that we’re in a range-bound market, with investors thus far generally able to shrug off the trade war fears, but still likely to be vulnerable to dour news and rumors on that vexing front. That should keep volatility high.