The first estimate of 2nd quarter GDP growth came in at 2.6%, a nice acceleration from the first quarter’s meagre growth rate of 1.2%.
The Institute for Supply Management’s Manufacturing Index confirms the improving GDP growth. It fell 1.5 points in July but remained above the important 50% level that is considered the dividing line between a strengthening economy and a weakening economy. Respondents to the survey also reported eight different commodities being in short supply. The last time eight or more commodities were in short supply was in October 2005 which, not coincidentally, was the last time GDP growth was 3%. Strength in foreign economies is evident as well, with the Global Purchasing Managers Index at its highest level in two years.––
The labor market also continues to remain on firm ground. The nonfarm payroll report for July showed that 209,000 jobs were created during the month, which beat expectations of 175,000 new jobs and extended the job growth streak to a record 82 months. The unemployment rate ticked down to 4.3% as a result. The Job Opening and Labor Turnover Survey (JOLTS) also hit a record high of 6.12 million, indicating that workers are confident that they can find a new job if they leave their current one.
Despite these signs of economic strength, inflation remains under control. Over the past year, Average Hourly Earnings have risen only 2.5% and the Consumer Price Index (+1.7%) remains below the Federal Reserve Board’s 2% target. Improving economic conditions have allowed the Fed to raise the short term Fed Funds rate to 1.25% with expectations for one more increase during 2017. The Fed has also stated its intention to begin shrinking its balance sheet, which grew to unprecedented levels after three rounds of quantitative easing in the wake of the Great Recession of 2008-2009.
Stocks, meanwhile, have been enjoying an unusual streak of low volatility. On August 8th, the Dow Jones Industrial Average’s streak of consecutive up days came to a halt at 10, tying it for the sixth longest streak since 1930. During this streak, the Dow also completed nine consecutive days of making new all-time highs, the third longest streak ever. Helped by Apple ’s positive earnings, the Dow also crossed the 22,000 mark in early August. Despite this accomplishment (one which is less significant than in years past due to the fact that each 1,000 point hurdle is a smaller percentage increase as the Dow Jones Industrial Average rises), investors’ enthusiasm remains somewhat subdued. Recent surveys by the American Association of Individual Investors reveal that only 33.7% of investors expect stocks to be higher six months from now, below the historical average of 38.3%. Historically, these surveys have been decent contrary indicators. Consequently, the current investor skepticism of this bull market may support future gains.
Year to date through July, the Standard and Poor’s 500 large cap index has risen 12.90%, well ahead of the Russell Midcap (+9.58%) and Russell 2000 Smallcap (+5.77%) indices. Large Cap Growth stocks also beat Large Cap Value stocks by nearly 11% points. After years of underperforming U.S. markets, Developed International stocks (+17.09%) and Emerging Markets (+25.49%) have seen their fortunes reverse this year.