Market Strategy Radar Screen Weekly July 30, 2018

History May Not Repeat Itself but it Often Rhymes

We quote Mark Twain after GDP slightly misses and tech disappoints

The Bureau of Economic Analysis reported last Friday that the US economy grew at a 4.1% pace in the second quarter—its fastest quarterly gain since 2014.

The Administration was quick to take a bow after the report was released on Friday, tying the boost in growth to its economic policies including the tax overhaul and its efforts to cut regulation.

Treasury Secretary Mnuchin on a weekend news show on Sunday said that the jump in second-quarter growth showed the US economy is “well on the path” for four or five years of sustained annual growth of 3 percent.

As strategists, we’ll respectfully take our good news one year at a time and resist counting our chickens before they hatch.

That said, good news is good news. While the GDP number just slightly missed the expectations of a widely followed survey of economists (4.2% vs. 4.1%), it was close enough we’d say to put a smile on the faces of Wall Street’s bulls, force a disappointed expression on the countenance of bears and coax an ever-quizzical expression on the faces of skeptics.

Economists’ survey forecasts currently call for growth to come in around 3% for this year. That would be a solid improvement over the modest pace seen in recent quarters and significantly stronger than the 2.3% average growth experienced by the US economy in the expansion that got its start in 2009 (it’s worth noting that the administration’s official goal is for sustained GDP growth at a rate of 3% or more while the Fed’s longer-run forecast sees the economy expanding at a pace of 1.8%).

The 4.1% read on second-quarter GDP was boosted by consumer spending, business investment and a decline in the trade deficit. Expectations among some economists and market participants are for the effects from the tax cuts to fade moving forward with 3% growth this year tapering off to around 1.8% by 2020. The IMF (The International Monetary Fund) currently projects US growth of 2.9% this year and 2.7% in 2019.

Strong Growth Supports the Fed’s Rate Normalization

Those projecting a tapering of growth believe the effects of tax cuts will fade and that foreign tariffs, a strong dollar and rising interest rates will hurt business. However, these projections might fail to be realized if a protracted trade war is averted, inflation stays moderate and the Fed remains sensitive to strengths and vulnerabilities in the economy.

According to Bloomberg news, the last time the economy enjoyed a sustained period of growth above 3% was nearly a quarter century ago in the late 1990s during Bill Clinton’s second term when GDP was boosted by a surge in productivity driven by technology advancements.

Regardless of the varied spreads between expectations for economic growth held amongst the administration, the Federal Reserve and a posse of economists, stronger growth is stronger growth. We’ll take it and accept the uptick just posted and the aforementioned expectations of further 3%+ expansion gladly and look for the support such growth could provide corporate revenue and earnings should it be realized.

Last Friday’s number if eventually proven as a good indicator for the pace of growth ahead could justify the Street’s expectations for two more hikes by the Fed before year-end.

We still think that there’s a chance the Fed could hike just once more this year (more likely in December than in September) as the risk overhanging the economy and the markets from the trade skirmish and that of a protracted trade war remains on the table if somewhat reduced by last Wednesday’s meeting on trade between president Trump and European Commission president Jean-Claude Juncker.

Investors were reminded last week that there’s never an all clear signal sounded over the market landscape as a three consecutive day rally in the equity markets ran into a snag at the end of the week as two tech bell weathers belonging to the FANGs delivered disappointing quarterly results dragging shares of their fellow FANGs as well as the NASDAQ Composite, the NASDAQ 100 and the S&P 500 tech sector lower.

Can’t Keep Surly Tech Bears Quiet

We’ll leave it to the analysts to sort out the details of the latest drama in the tech space but from our perch on the market radar screen last week’s disappointment broadly looked more like some investors seeing an opportunity for some healthy profit taking on stocks that had enjoyed a good run-up (despite a number of challenges earlier in the year which they later powerfully overcame).

That thought notwithstanding, once again a posse of bears has surfaced predicting that this latest stumble in technology stocks could prove different than technology stocks’ other misses earlier this year. With fundamentals pretty much intact among the names that stumbled last week, we’d be reluctant to get too bearish on technology.

We believe that this latest drama in the tech space will in hindsight (which by good chance may be not all that far in the future) once again prove to be more of an opportunity to “buy the dip” rather than to “run for the hills” based on the ubiquitous nature of technology and the cyclical and secular trends that are presently dramatically changing the way governments, education complexes, businesses and consumers function and interact on a daily basis.

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