August 7, 2018

The major stock market averages gapped up at the open today (Dow +150 pts; SPX +.38%). Energy, financials and industrials are leading the way. Utilities, real estate and consumer staples are sagging. And finally we’re seeing a pickup in foreign stock markets (FTSE 100 Index +.9%; Nikkei +.7%; Shanghai Composite +2.7%). Bloomberg says European cyclicals are catching a bid after a strong earnings season; traders may be rotating back into foreign markets. That’s bound to happen at some point, because stock valuations are so much cheaper overseas. Vanguard’s FTSE All-World Ex-US ETF (VEU) has underperformed the SPX by nearly 10 percentage points this year. The VIX Index has cratered this month, now trading at 11. The US dollar is weaker today against a basket of currencies, and that’s giving a lift to commodities. WTI crude is rebounding toward $69.20/barrel after a production cut by Saudi Arabia. Bonds are trading down as yields tick higher. The 5-year and 10-year Treasury yields are currently at 2.83% and 2.96%, respectively. 

Second quarter earnings season is a resounding success. With roughly 420 of the S&P 500 companies having reported, 71% beat Wall Street sales forecasts, and nearly 84% have beaten profit expectations. In terms of growth, aggregate sales are up 10% from year-ago levels, and profits are up 25%. Those are pretty strong numbers compared with historical averages. Sectors with the fastest revenue growth include materials, energy and technology. But it should be noted that healthcare and consumer discretionary sectors showed very surprising strength compared with forecasts. 

The Bureau of Economic Analysis (BEA) just finished revising its estimates for household income going back to 2012. The bottom line is that Americans have been making more money than we thought. BEA increased income estimates from 2012 to 2018 by $3 trillion. Apparently, the update was driven by new statistics and data from the IRS. During the period 2012-2017, the average annual rate of growth of real disposable personal income was revised up to 2.2% from 1.8%. In addition, consumer savings rates were revised upward. The 2017 savings rate went to 6.7% from 3.4%! That’s a big deal, and it’s going to have a direct and positive impact on prior gross domestic product (GDP) figures. Remember, the BEA is in charge of measuring economic growth and declaring recessions. 

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