7/27/18 – Stocks Rally on Earnings & Economic Growth

Both indices gained ground in a week that saw generally positive earnings results and 2nd quarter economic growth that exceeded 4%. This is the first time in four years that the economy grew at a 4% annualized rate for a quarter. The Dow gained 1.6% this week while the S&P 500 rose 0.6%.

The US economy grew at a annualized rate of 4.1% in the 2nd quarter in the initial reading from the Commerce Department. The economy benefited from economic activity that occurred ahead of tariffs and potential tariffs, but overall the report was still quite positive. From 2010 through 2016, the US economy grew at an average annual rate of 2.1%. Over the last five quarters, the economy has grown at an average of 3.1%. While that might not seem like a large difference, on an $18.5 trillion economy that amounts to significantly more economic activity. Growing at 4% for a sustained period, which occurred during the Reagan and Clinton terms, seems unlikely given the overall size of our economy today versus during the 80/90s. Even growing around 3% would give us an economy like we haven’t seen since the 90s. So far this century, economic growth averaged roughly 2% per year. Read more

While earnings have generally been very good this quarter, Facebook and Twitter significantly disappointed investors. Facebook achieved a dubious honor by suffering the largest single-day loss in value in history when the company’s value declined by over $100 billion after its earnings report. Facebook continues to make a lot of money with very high profit margins, but the company expects margins to decline over the next few years as it invests in security and other initiatives. Twitter declined over 20% today following a decline in monthly average users. Twitter purged millions of accounts last month in an attempt to eliminate fake/bot accounts. Everyone seems to believe that a larger company needs to buy Twitter, but so far no company has been able to justify the price.

Oil declined this week, decreasing 1.9% to close at $68.94/barrel. The yield on the 10-yr Treasury moved higher, closing at 2.96% from 2.89% last week. The average rate on a 30-yr fixed rate mortgage moved higher to 4.54%, from 4.52% last week.

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