10/27/17 – Stocks Higher As Economic Growth Remains Strong

  • 3rd quarter GDP better than expected
  • Retail sector down sharply today, led by JC Penney sell-off
  • When will the new Fed Chair be announced

Stocks finished the week slightly higher on strong earnings and a potential Fed Chair announcement. The market was also buoyed by a better-than-expected first report on 3rd quarter economic growth. The economy grew at an estimated annual rate of 3.0%, well above the 2.5% consensus estimate. The 3rd quarter is often strong as companies build inventory into the holiday shopping season. Last year, the economy grew at a 2.8% annualized rate in the 3rd quarter. The 2nd quarter of this year grew at a 3.1% annualized rate. The two quarters are the best consecutive quarters we’ve seen in three years. For the week the Dow gained 0.5% while the S&P 500 increased 0.2%.

The retail sector has been under assault for several years by Amazon and other online retailers. More and more consumers choose to order online. I order plenty online because I know I’ll get it quicker even with shipping versus when I’ll have time to go to the store. Within the retail sector, traditional department stores seem to be getting hit really hard. Department stores need huge inventory levels yet are facing declining foot traffic. JC Penney’s reduced its 2017 earnings forecast and the stock was hit hard, closing down around 15%. The news hurt the rest of the sector as well as Macy’s declined 8% while Kohl’s was down 5%. Retail shopping is going to continue to decline, but there has to be some floor of consumers who like going to the physical mall to buy clothes. We haven’t found that level yet. Read More

Speculation around the next Fed Chair has been going on for months, but today the White House Press Secretary said an announcement was coming next week. Reports suggest Trump will appoint current Fed Governor Jerome Powell. Powell was appointed to the Board in 2012 by President Obama. I think Janet Yellen has a done a nice job as Fed Chair. She’s taken a prudent, measured view to raising interest rates, resisting some calls for a quicker progression. I’ve been of the view that rates should rise at a slower rate than many have predicted. The economy is growing, but not overheating, and inflation is largely at bay. What company has pricing power right now to drive higher inflation? Very few. Mr. Powell isn’t that different from Ms. Yellen, so it’s unclear to me why Trump wouldn’t appointed Yellen to a second term. Potentially he just wants to make a change, but if Powell is appointed, I think we’ll continue to see a more measured increase in interest rates. Read More

Oil rose sharply this week, increasing 4.4% to close at $53.95/barrel. The yield on the 10-yr Treasury moved higher, up to 2.42% from 2.38% last week. The average rate on a 30-yr moved higher, to 3.94% from 3.88% last week.

Close Weekly YTD
Dow Jones 23,434.19 0.5% 18.6%
S&P 500 2.581.07 0.2% 15.3%
Oil 53.95 4.4% 0.1%
10-yr Treasury (∆ in bps) 2.42 4 (3)

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