By: Dividend Sensei
Click here to read up on the intro to this portfolio, the theory behind it, and its methodology.
Weekly Economic Data Review
Overall it was a very solid week for the economy and the market, which rose 1.4% to hit another all time high.
Industrial production (which benefits from the weakening dollar) was up 0.4% in the past month, higher than expected and much better than last month’s 0.1% gain.
Meanwhile the JOLTs jobs report shows a “disappoingting” number of job openings (5.66 million), but more importantly the private sector quit rate has climbed to 2.5%, the highest level since 2005.
The reason that the headline job opening number is less important than the quit rate, is because the number of available jobs is a highly volatile estimate. But the quit rate, meaning what % of privately employed workers quit their job last month, is a sign of increasing worker confidence.
After all, if you were worried about the job market, or your ability to find a better, higher paying job, would you quit your current one?
Meanwhile inflation is weakening, now down to just 1.4% based on the core PCE (the Fed’s favorite inflation metric). That’s the big reason why the market rallied last week, because Janet Yellen, the head of Fed, testified before Congress that if inflation continues to come in below expectations (2%) that the Fed may slow the rate of interest rate hikes.
That would mean rates would remain low for longer, which the market loves.
More importantly though corporate earnings continue to look very impressive.
For example, according to FacSet Research (FDS) so far corporate earnings (6% of companies reporting by July 14th), have strongly beaten expectations.
In fact, so far 83% of companies are beating EPS expectations (by an average of 8.3%), and 83% are beating revenue estimates (by 1.7%). Both are above the five year average
And given the rising expectations for corporate earnings this year (without tax reform) this bodes well for the market’s ability to keep rising while at the same time valuations come down, minimizing the risks of a short-term correction.
That’s despite the economies continued weak growth, with the New York Fed’s real time GDP growth estimates mostly unchanged in the past week, while Atlanta reported a much weaker estimate
New York Fed GDP NowCast: 1.9% for Q2 1.8% for Q3 (Q2 down 0.1% Q3 unchanged)
Atlanta Fed GDPNow: 2.4% for Q2 (down 0.3% from last week)
Note that Atlanta has been far more optimistic all quarter, so really what we’re seeing is merely both sets of estimates converging ahead of the actual Q2 GDP growth estimate that will be released on July 28th.
Meanwhile the risk of a recession, based on the leading indicator super index (which tracks 9 leading economic indicators), in the next three to four months is 2.48%, down from 3.07% last quarter.
So all in all, economic growth of about 2% a year, with very low and falling inflation is good for both consumers, and companies. Meanwhile corporate profits are rising fast enough to potentially forstall a correction (that’s now 8 months overdue by historical standards) for who knows how long.
The bottom line for investors is the same: Stay invested, don’t try to market, and buy what’s on sale.