ECONOMY:EVIDENCE OF A PICKUP IN U.S. GROWTH
Economic reports released in June 2018, largely reflecting economic activity in May, showed continued solid economic growth in the U.S. and provided evidence of a pickup in growth from seasonally weak first quarter levels.
The U.S. economy grew at 2.0% in the first quarter, based on the third revision to estimated gross domestic product (GDP), slightly below the consensus estimate of 2.2% and well below the near 3% growth of the prior three quarters. Persistent problems with first quarter seasonal adjustments and a lull in consumer activity after some spending was pulled forward into the fourth quarter weighed on first quarter growth, but have led to expectations of a rebound in the second quarter. The modest downward revision to first quarter growth was driven by slower spending on services by consumers and an inventory adjustment, which is expected to lift second quarter growth.
As of June 30, Bloomberg consensus for second quarter GDP growth stood at 3.4% (quarter over quarter annualized), up from 3.1% at the end of May. The expected rebound is being supported by the roll-off of temporary factors including bad weather, in addition to fiscal stimulus put in place from the new tax law and the federal spending bill passed in March. A healthy job market, strong manufacturing and business confidence surveys, and the new tax law are all expected to give economic growth a boost over at least the next couple of quarters.
Inflation readings inched higher in June but generally met expectations. Headline readings were pushed higher by rising energy prices, so increases in core readings excluding energy prices were smaller. The core consumer price index (CPI) excluding food and energy increased 2.2% year over year; the Federal Reserve’s (Fed) preferred inflation gauge, the core personal consumption expenditures (PCE) deflator, increased 2.0%; and the prices paid component of the Institute for Supply Management (ISM) manufacturing survey rose more than expected to its highest level since April 2011. Wage growth accelerated slightly but remained within its 2018 range, as average hourly earnings increased 2.7% year over year in May, up from April’s 2.6% increase.
Labor markets remained healthy enough to potentially put further upward pressure on wages and keep the Fed on its gradual interest rate hiking path. The economy added 223,000 jobs in May, well above consensus expectations of 190,000 and a solid pace for the current later stage of the business cycle. Meanwhile, jobless claims remain near fourdecade lows despite increasing slightly over the past two months.
Retail sales growth accelerated in May, rising 0.8% versus April, double the consensus growth estimates and a 6.4% year-over-year increase. The increase, which came despite higher prices at the pump, was broad based with 10 of 13 categories showing growth. The data, even excluding volatile auto and gasoline sales, provided a clear sign that consumer spending has picked up in the second quarter after a soft start to the year. A healthy job market, wage gains, and tax cuts continue to support consumer spending.
Manufacturing activity remained robust in May, based on data released in June, despite ongoing global trade tensions. The ISM manufacturing index accelerated to 58.7 in May, up from the April reading of 57.3 and above consensus expectations at 58.2. This data continues to indicate expanding factory activity and to signal solid corporate profit growth. Reduced corporate tax rates, incentives for capital purchases in the new tax law, strong earnings, and high business confidence readings signal a favorable outlook for capital investment.
The Conference Board’s Leading Economic Index (LEI), an aggregate of 10 leading indicators, rose 0.2% in May and 6.4% year over year, slightly below consensus expectations and the prior month but still consistent with continued growth in the U.S. economy and low odds of recession in the coming year. New manufacturing orders and interest rate spreads were the biggest contributors, while building permits detracted most.
During its June 12–13 meeting, as expected, the Fed raised the fed funds rate 25 basis points (0.25%) to a new range of 1.75-2.00%. The Fed also raised its guidance for future hikes, i.e., the “dot plot,” with the median dot pointing to four hikes in 2018 rather than three. The Fed also raised its estimates for 2018 GDP growth, lowered the unemployment estimate, and raised the inflation forecast. The slightly hawkish change to forecasts and statement language, and the tone of the press conference, indicated to markets that a September rate hike was likely.
The European Central Bank (ECB) announced it would end its bond purchases (so-called quantitative easing) by year end as expected. On the other hand, in a slightly dovish development, ECB Chief Mario Draghi pledged to not raise interest rates until at least summer 2019 and that the benchmark rate would remain at zero as long as is necessary thereafter, depending on the data. TheBank of Japan maintained the status quo, as expected, with negative short term rates, long-term rates near zero, and continued unabated asset purchases.
Investing involves risks including possible loss of principal. No investment strategy or risk management technique can guarantee return or eliminate risk in all market environments.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual security. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. The economic forecasts set forth in this material may not develop as predicted.
All information is believed to be from reliable sources; however LPL Financial makes no representation as to its completeness or accuracy.
Stock and Pooled Investment Risks
Investing in stock includes numerous specific risks including: the fluctuation of dividend,loss of principal and potential illiquidity of the investment in a falling market.
Investing in foreign and emerging markets securities involves special additional risks.
These risks include, but are not limited to, currency risk, geopolitical risk, and risk associated with varying accounting standards. Investing in emerging markets may accentuate these risks.
The prices of small and mid-cap stocks are generally more volatile than large cap stocks.
There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not ensure against market risk.
Bond and Debt Security Risks
The market value of corporate bonds will fluctuate, and if the bond is sold prior to maturity, the investor’s yield may differ from the advertised yield.
Mortgage-backed securities are subject to credit, default, prepayment, extension, market and interest rate risk.
Government bonds and Treasury bills are guaranteed by the U.S. government as to the timely payment of principal and interest and, if held to maturity, offer a fixed rate of return and fixed principal value. However, the value of fund shares is not guaranteed and will fluctuate.
The Dow Jones Industrial Average (DJIA) is a price-weighted average of 30 blue-chip stocks that are generally the leaders in their industry.
The NASDAQ Composite Index measures all NASDAQ domestic and non-U.S. based common stocks listed on The NASDAQ Stock Market. The market value, the last sale price multiplied by total shares outstanding, is calculated throughout the trading day, and is related to the total value of the Index.
The Russell 1000 Index measures the performance of the large cap segment of the U.S. equity universe. It is a subset of the Russell 3000 Index and includes approximately 1000 of the largest securities based on a combination of their market cap and current index membership. The Russell 1000 represents approximately 92% of the U.S. market.
The Russell 2000 Index measures the performance of the small cap segment of the U.S. equity universe. The Russell 2000 Index is a subset of the Russell 3000 Index representing approximately 10% of the total market capitalization of that index.
The Russell 3000 Index measures the performance of the largest 3,000 U.S. companies representing approximately 98% of the investable U.S. equity market.
The Russell 3000 Growth Index measures the performance of the broad growth segment of the U.S. equity universe. It includes those Russell 3000 companies with higher priceto-book ratios and higher forecasted growth values.
The Russell 3000 Value Index measures the performance of the broad value segment of U.S. equity value universe. It includes those Russell 3000 companies with lower priceto-book ratios and lower forecasted growth values.
The Russell Midcap Index offers investors access to the mid cap segment of the U.S. equity universe. The Russell Midcap Index is constructed to provide a comprehensive and unbiased barometer for the mid cap segment and is completely reconstituted annually to ensure that larger stocks do not distort the performance and characteristics of the true mid cap opportunity set. The Russell Midcap Index includes the smallest 800 securities in the Russell 1000.
The S&P 500 Index is a capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.
This research material has been prepared by LPL Financial LLC.
To the extent you are receiving investment advice from a separately registered independent investment advisor, please note that LPL Financial LLC is not an affiliate of and makes no representation with respect to such entity
Not FDIC or NCUA/NCUSIF Insured | No Bank or Credit Union Guarantee | May Lose Value | Not Guaranteed by Any Government Agency | Not a Bank/Credit Union Deposit
Tracking #1-747224 (Exp. 07/19)