A Short Week in the Market & GDP Report

By David B. Armstrong, CFA | Jun 02, 2015 | Weekly Market Commentary

U.S. stocks got off on a shaky start last week as the closely followed Dow Jones Industrial Average tumbled 190 points on Tuesday. Turns out that this was the worst single-day occasion for the index in approximately a month. Information technology stocks and small-cap stocks were among the hardest-hit segments of the market; these are two of our favorites, and are over-weighted sectors in our strategies.  But then BOOM – the Dow gained 121 points the following day and technology stocks had big gains that wiped out the preceding day’s drop.

GDP

As a refresher, GDP is released quarterly and there are three separate reports that examine each quarter.  For instance, the GDP for the first quarter of 2015 was initially released at the end of April.  Last week, a revision to that release (called the second estimate) was reported.  Toward the end of June, the third report will come out.

Last Friday’s report revised the initial estimate from April DOWN from +0.2% to -0.7%.  This negative reading reflects the damaging effect that the strengthened U.S. dollar has had on overseas demand for American goods. Exports during the first quarter declined 7.6%, compared with a prior estimate of a 7.2% drop.

Friday’s report was not a huge surprise – we wrote about it last week, “Warning – 1Q [first quarter] Gross Domestic Product may be revised lower and may even come in negative for the 1Q as the first revision is reported this week.”  Recall from a previous blog where I wrote about the recent GDP report that 1Q Gross Domestic Product grew just 0.2% on an annualized basis.

Looking forward, I really believe that the circumstances that dragged 1Q GDP down are going to improve and the consumer is going to lead the way. We have the continued improving jobs market, there are preliminary signs that wages are accelerating, and gasoline prices are still pretty low relative to where they normally are this time of year.  Throw in a little increase in consumer confidence and this should result in some increased consumer spending.

Also, getting a little more technical, the yield curve is still positive.  See the chart below which shows the U.S. Treasury Yield Curve.  The Y axis shows the interest rate and the X axis shows the years. As you go from left to right on the X axis, each interest rate is higher than the previous one.  That’s a “positive yield curve” and it is a good indicator that the economy should continue to accelerate.

Bottom line is that all the negative economic reports and readings from the 1Q should diminish and we should see more robust economic growth for the rest of 2015.

Here’s a quote from my blog on April 6th

“I think we’ll see the U.S. economy return to a sturdier course of growth over the next six months as weather improves.  Oh, and let’s not forget that lower oil is a massive source of stimulus for the U.S. and other economies around the world.

We are in the pro-growth camp.  While equity investing may seem challenging RIGHT NOW, we feel that looking farther down the road, there is a lot more pointing to growth than contraction. Interest rates will rise and bonds will not do well.  That’s not only my opinion but it’s pretty well grounded in academics as well.  Will volatility be high?  Sure.  Especially given the impending rate hikes and the cloudy short-term corporate earnings picture. If you need money to buy something over the next twelve months, raising cash and sitting on it is not a bad strategy.”

Here’s a quote from last week’s blog on May 27

“We believe 2Q will bounce back very nicely and investors SHOULD STAY INVESTED AND NOT MESS AROUND WITH TRYING TO RAISE CASH AND THEN REINVESTING LATER.”

In fact, here’s the best piece of advice I have for you: if you are a current MWM client, go have a good summer and don’t mess around with your investments.  We are on top of it and if something needs to be adjusted, we will let you know.  Remember, often the best action is inaction.

If you are not a client, forward me the blog of your current advisor.  I always enjoy reading the thoughts of others.  If your advisor doesn’t have a blog, ask them why.

Please call with questions.

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