Bad to the bone. B-b-b-b-bad.
Written by: Benjamin Bimson CIMA® / BCJ Financial Group
When data points that are “disappointing” turn into good news for the markets, I have to chuckle. This past week a handful of meaningful and important economic indicators should be considered. First, the Fed meeting this week left key interest rates unchanged per economic expectation. Then, on Friday Real GDP for Q2 was released, and the numbers were significantly lower than expected. Consensus expectation was for growth in Q2 to have picked up from Q1 to a 2.6% annual rate. Instead, the GDP numbers that were released indicated only a 1.2% annual expansion rate.1
So why in the world would disappointing numbers result in markets remaining calm, and seem to support the current high valuations in the market? Really the reason is simple. The Fed is the only game in town right now, and the market has stubbornly remained fixated on hoping the Fed keeps money easy for as long as possible.
Despite the Fed’s statement that, “the labor market strengthened and that economic activity has been expanding at a moderate pace,” the market read the GDP data released Friday, along with the statement from the Fed, and concluded that the Fed will have a very hard time raising rates in the next few months. What can we say? The market loves the easy money policy!
Below is the GDP plotted as a percentage change. It looks like it isn’t the end of the world, but it still is giving the Fed a really hard time making the excuse to raise rates. Hovering around the 0 line isn’t exactly an indicator of robust economy.
The good news is that corporate earnings have been mostly in-line with expectations and the FANG stocks (Facebook, Amazon, Netflix and Google), have actually surprised to the upside, which has been great for supporting the current PE ratio.
The following shows the FANG stock prices over last week where you can see the market liked the corporate profit announcements! The breaks trending higher follow announcements.
This is a good thing since the chart below shows current PE ratios being pretty high, and we really need to keep seeing positive earnings to support these numbers.
So for now, after last week’s data on GDP and the Fed statement, we are looking for continued support at these stock market levels. As we head into the full Presidential election season, deal with arising Brexit issues, and continue to face geopolitical events both inside and outside of the US, some risk still persists.
The markets have the ability at this point to break either direction and we have to be ready to adjust and not be too stubborn to change positions if the data supports it. There is currently enough positive market momentum to remain hopeful that the markets can continue to rally, but the environment can shift very quickly!
1 Consumer Spending Drives Q2 GDP, But Momentum Wanes. Ned Davis Research Group. July 29, 2016. [7/29/16]
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