After nudging out a new high early in the week, the S&P 500 broke definitively higher following a slate of positive economic data and a Fed meeting that passed without incident. With this week’s releases we know the economy is still growing faster than expected, job gains are beating expectations, the slide in manufacturing could be starting to slow, corporate earnings are much better than expected, and the Fed is in no hurry to reverse course on their recent rate cuts. All of this adds up to a market that is moving north.
The 3rd quarter’s GDP release affirmed a lot of what we knew. The consumer is strong (adding 1.93% to GDP growth), government spending is rising (adding .35% to GDP growth), and investment is weak (subtracting .27% from GDP growth). Net exports also subtracted .08% from GDP growth for a grand total of 1.9%. Digging deeper, consumer goods momentum is strongest in recreational goods and vehicles and non-durable goods like food and household products. In the consumer services sector, housing and health care expenditures are generating the greatest gains. On the investment side, the trade war continues to inflict its greatest damage on business expenditures like structures and equipment. Intellectual property expenditures continue to be a lone bright spot, reinforcing the growing importance of the digital realm to economic growth. Residential investment was relatively strong and meshes with the data we’ve been seeing from the homebuilding industry.
The October jobs report also helped to bolster the narrative of a strong consumer. The U.S. economy added 128K jobs vs estimates of only 75K. In addition, prior months were revised higher by 95K. Unemployment ticked moderately higher, but only because the labor force participation rate rose to 63.3%. More people are landing jobs and more are increasingly confident in their ability to find one. With this backdrop, there is little reason to think the consumer can’t continue to hold up the economy as they did in the 3rd quarter.
If there is a risk, it’s that trade is still a missing ingredient. Details about the phase 1 deal remain absent and nothing has been signed yet. So far, the pressure on investment and manufacturing hasn’t translated to jobs or to corporate profits in a big way. The manufacturing PMI showed that the sector contracted for a 3rd straight month, but the pace of decline does appear to be slowing. Still, CapEx growth has essentially dried up and given a long enough time span, jobs and profits will be impacted. We still need a deal and this month’s negotiations are critical. It’s the difference between the market starting a prolonged run higher or reversing course.
For their part, the Fed has all but moved to the sideline. They delivered their third rate cut and at least theoretically kept the door open to further cuts should they be warranted, though the appetite for further cuts may be waning with the more positive economic momentum of late. Most importantly, the Fed demonstrated they are in no mood to hike rates again anytime soon. This is enough for the market to feel comfortable moving forward. A real trade deal could be an explosive force.
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