November Monthly Insights
By many measures the U.S. economy seems to be gaining steam. After years of slow growth, recent data points to an acceleration in economic activity. However, the recent hurricanes that ravaged the U.S. are temporarily impacting many economic reports, making it hard to fully grasp the health of the underlying economy. Some numbers appear artificially high (ISM reports as an example), while many others have seen negative impacts from the storms. On the whole, the anticipated impact from the hurricanes should follow a pattern of initial declines, followed by longer-term growth as rebuilding takes place. In the meantime, I view many of the current economic reports with a grain of salt and will focus more on big picture reports this month.
The first estimate of third quarter GDP growth, released this month, showed a gain of 3 percent. This marked the first time since 2014 that U.S. growth surpassed 3 percent for two consecutive quarters. The strong reading was led by an acceleration of gross private domestic investment, while personal consumption growth slowed from the previous quarter. Even though private investment benefited from a transitory change in inventory levels, there are encouraging signs that business investment has picked up over the last few quarters.
The most significant evidence of this is the strengthening of durable goods orders in 2017, after a couple years of lackluster numbers. The latest report showed core durable goods orders up 7.5 percent, the highest annual growth rate going back to 2014. Businesses are once again investing, and it is already starting to translate into higher productivity levels. With the economy approaching full employment, an increase in labor productivity is a crucial component of growth moving forward. If this productivity trend continues, it may eventually lead to stronger wage growth. However, as of right now, wage growth has actually weakened over the past few months.
This pickup in economic activity has not gone unnoticed by the stock market. U.S. equities continue to move higher with very little volatility. In fact, as of this writing the Dow Jones Industrial Average has gone 60 days without an intraday move greater than 1 percent. Even more, the S&P 500 has gone 258 days without a 5 percent pullback. While low volatility has been the story for a while now, we are beginning to see some signs that tell a slightly different story. In reality, the current market appears like a duck on water; calm on the surface, but kicking violently underneath.
With earnings season well underway, individual stocks are jumping around more than I can remember in the recent past. It is not unusual this earnings season to see a stock move up or down 5 percent based on their earnings report. More often than not, these moves have been to the downside, as drops from earnings misses have been far larger than the bounces seen after positive earnings surprises. This is not necessarily a bad thing. It is allowing many stocks to reprice to more reasonable levels, without the market feeling the full brunt of the adjustment, and providing your team at Allegiant with buying opportunities. However, we must continue to watch how these stocks react as we enter the final months of the year.
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Benjamin W. Jones, CFP?, AIF?
Chief Investment Officer
Forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. Past performance in no guarantee of future results. All indices are unmanaged and investors cannot actually invest directly into an index. Unlike investments, indices do not incur management fees, charges, or expenses. The Dow Jones Industrial Average is a price weighted average of 30 actively traded blue-chip stocks. The S&P 500 Index is a broad-based measurement of changes in stock market conditions based on the average performance of 500 widely held common stocks. The Russell 3000 is a market capitalization weighted equity index encompassing the 3,000 largest U.S. stocks. The MSCI EAFE Index is a float-adjusted market capitalization index designed to measure developed market equity performance, excluding the U.S. and Canada. The Emerging Markets Index is a float-adjusted market capitalization index that consists of indices of 21 emerging economies. The CBOE Volatility Index is a key measure of market expectations of near-term volatility conveyed by S&P 500 stock index option prices. The Shanghai Composite Index is a stock market index of all stocks (A shares and B shares) that are traded at the Shanghai Stock Exchange. The ISM Manufacturing Index is based on surveys of more than 300 manufacturing firms by the Institute of Supply Management. The Non-Manufacturing ISM Report on Business is a purchasing survey of the United States service economy, published by the Institute for Supply Management. Investments involve risk including possible loss of principal amount invested.