Weekly Market Commentary – July 29, 2019

U.S. gross domestic product (GDP) rose enough to calm recession worries, but not enough to cause the Federal Reserve to stray from an expected interest rate cut this week. The S&P 500 resumed its steady climb as positive earnings news and the economic data reassured investors. The S&P 500 climbed 1.7%. The MSCI ACWI rose 0.8% and also reached a new high. The Bloomberg BarCap Aggregate Bond Index was unchanged from the previous week.

real GDP

Key Points for the Week

  • U.S. GDP grew 2.1% last quarter as consumer spending fueled growth.
  • The Federal Reserve meets this week and is expected to lower interest rates in response to falling inflation and weak business spending.
  • Stocks set new records as the S&P 500 hit a new high.

The Whole Market in One Number

It is said that a picture is worth a thousand words. But what about a statistic? Can it be worth even more? Last week, the U.S. Department of Commerce announced U.S. GDP grew 2.1% last quarter, beating expectations by 0.1%. As seen in the accompanying chart, growth was slower than in the first quarter and more in line with the slower growth periods of 2016.

The headline number is informative. But an examination of the underlying data reveals this single data point provides broad insight into the underlying trends moving financial markets:

  • The U.S. consumer is confident. Personal consumption expenditures rose 4.3% in the quarter as jobs are plentiful, wages are increasing, and consumer debt is at manageable levels.
  • Uncertainty about trade is causing businesses to pause. Gross private domestic investment, which includes buildings, rental housing, factories, and some technology expenditures, dropped 5.5%.
  • Tariffs cause sharp swings in the data. In the first quarter, inventory and trade data were strong contributors as Chinese companies made larger purchases of some goods in advance of tariffs. Those numbers reversed in the second quarter as fewer new goods were needed because of the extra ordered in the first quarter.
  • Government spending is rising. As indicated by the GDP number and last week’s budget deal, the federal government continues to show bipartisan support for additional spending while keeping taxes at reduced levels. State and local governments are benefitting from the strong consumer spending and are spending more, too.
  • The Federal Reserve has room to cut. Core inflation was solid but not as high as the Fed desires. Lower interest rates can make investment cheaper, and the Fed is anxious to maintain robust activity in order for the economy to remain strong.

The GDP number gives insight into the strengths and weaknesses shaping investment markets. It also shows how key market participants are likely to respond. GDP showed enough weaknesses for the Fed to lower rates this week. Investors will get some indication of how concerned the Fed is and how many times it will cut rates after this week.

Fun Story

Speaker Pelosi Maximizes Flight Delay

How do you spend a three-hour flight delay? Complaining via text and every social platform app on your phone? Catching up on your friend’s idealized sharing of their lives on Facebook, Snap Chat, or Instagram? Not Nancy Pelosi. She sits for three hours (in coach!) negotiating the aforementioned budget deal with a phone pressed hard to her ear. Whether you are a Pelosi fan or not, we can all learn how to stay productive the next time we get stuck on a plane.

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