GOOD NEWS ON THE ECONOMY

Stocks opened modestly lower today (Dow -21 pts; SPX flat). The stock market has been softish for the last three days. Defensive sectors—real estate, consumer staples, utilities—are performing the best in early trading. Materials and energy sectors are down 1%, giving back some recent outperformance. The GDP report (see below) caused the dollar to strengthen and interest rates to rise. So not surprisingly, most commodities are in the red. WTI crude, however, is holding steady at $57/barrel. Bonds are falling in price, rising in yield. The iShares 20+ Year Treasury Bond ETF (TLT) is down nearly .5% today. The 10-year Treasury note yield backed up to 2.72%.

The Bureau of Economic Analysis (BEA) at long last released its estimate of US economic growth for the fourth quarter of 2018. Gross domestic product (GDP) grew 2.6% from the prior quarter (annualized), compared with economists’ consensus forecast for just 2.2%. As expected, economic growth slowed at the end of 2018. Both the second and third quarters saw greater than 3% growth. But if growth can be sustained between 2.5% and 3% that should suffice to keep the economic cycle on track. The US has a rather unconventional way of measuring growth (quarter-over-quarter, annualized). Most other countries measure the simple year-over-year rate of growth. On that basis, US fourth quarter GDP rose 3.1%, the highest in 3 ½ years. Bloomberg says that while “moderation in growth proved to be much more benign” than most anticipated, this GDP report is “whistling past the graveyard.” That is, part of the report’s strength lies in an inventory build, which is not sustainable. When businesses are building inventories economic growth is boosted, but only temporarily. However, inventories aren’t the only source of strength in today’s report. Consumer spending rose a very healthy 2.8% and business fixed investment shot up over 6%. That’s a big deal. Finally, the report confirmed that inflation is well in hand. The Federal Reserve’s preferred measure, “Core PCE,” rose 1.7% from the prior quarter, and 1.9% from year-ago levels. The Fed’s target is 2%.

The Chicago Purchasing Managers’ Index surged to 64.7 this month vs. 56.7 in January. As with any PMI, any reading over 50.0 indicates businesses are expanding. Business leaders surveyed said the cost of raw materials is rising, production levels and the volume of new orders increased, and hiring activity accelerated. This is really a very strong report and I’m guessing it took Wall Street by surprise.

Investors Business Daily (IBM) reports that a bill has been introduced in Congress proposing to essentially ban private health insurance and replace it with a sort of Medicare-for-all system. It is being taken as a sign of the Democratic party’s shift toward socialism. Immediately afterward, stocks of healthcare companies fell. IBD notes, “Both the price tag and level of disruption of the current system would be extreme, but Wall Street is already getting nervous about what might happen after the 2020 election.” The presumption among investors is that if the Republicans lose control of the Senate, the healthcare sector will be uninvestable.


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