On the latest edition of Market Week in Review, Mark Eibel, director, client investment strategies, and Rob Cittadini, senior director, U.S. institutional, discussed second-quarter GDP (gross domestic product), global central-bank dovishness and Q2 earnings season.
U.S. economy still growing at solid pace
The U.S. logged a 2.1% GDP growth rate in the second quarter, Eibel said – slightly higher than consensus expectations of roughly 1.8%. “Simply put, the GDP number had a 2 in front of it – and that’s a good thing for markets and the economy,” he said. When added to the 3.1% growth rate observed during the first quarter, the U.S. economy expanded at a clip of approximately 2.5% in the first half of 2019, Eibel noted.
Digging further into the report from the Commerce Department, Eibel noted that consumer spending increased at an annualized rate of 4.3% during the April-to-June period, with government spending also seeing a boost. Capital expenditures, on the other hand, came in a little light, he said.
Overall, the GDP report contained few surprises, Eibel stated, which is likely what led to the muted market reaction. The bigger question now, he said, is whether the economy can continue to grow at a similar pace during the second half of the year. “This will likely prove to be a bit more of a challenge,” he remarked.
Fed rate cut expected at upcoming policy meeting
The U.S. Federal Reserve (the Fed) is widely expected to lower interest rates at the conclusion of its July 30-31 policy meeting, Eibel said. He and the team of Russell Investments strategists believe that a 25-basis point cut is most likely, especially in light of the Q2 GDP reading. “In our opinion, an economic growth rate above 2% makes it harder to justify slashing rates by 50 basis points,” he stated, adding that one could argue a rate cut isn’t even necessary with economic growth remaining solid. However, the Fed has strongly signaled that a reduction in interest rates is on the way, Eibel said, explaining that markets would likely react poorly if monetary policy was left unchanged.
Shifting to the European Central Bank (ECB), Eibel noted that while it held rates steady at its July 25 meeting, the central bank also struck a very dovish tone about future monetary policy. “The ECB signaled that rate cuts could be in store soon, and that it may also re-start its quantitative easing (QE) program,” Eibel noted. This is just the latest example of how central banks around the globe have pivoted to a dovish tone in 2019, he added.
Preliminary Q2 earnings season results
Transitioning to second-quarter earnings season, Eibel said that so far, a majority of companies are beating expectations, with year-over-year growth rates remaining largely flat. The sales growth numbers, however, are a bit more depressed, he noted. “If you take the sales numbers as an indication of where the economy could be headed, there’s certainly a signal that softer times may be around the corner,” Eibel said.
Broadly speaking, the global economy continues to slow, he noted, with a marked weakening in the manufacturing sector. However, retail numbers in the past several months have been surprisingly strong, including in the U.S., Eibel pointed out. Ultimately, consumer strength really appears to be what’s keeping the economy churning at the moment, he said. “The key question moving forward is whether the U.S. consumer will remain strong enough to hold growth rates above 2%, or whether other factors – such as ongoing trade tensions and declining business investment – will start dragging the economy down more,” Eibel concluded.
These views are subject to change at any time based upon market or other conditions and are current as of the date at the top of the page.
Investing involves risk and principal loss is possible.
Past performance does not guarantee future performance.
Forecasting represents predictions of market prices and/or volume patterns utilizing varying analytical data. It is not representative of a projection of the stock market, or of any specific investment.
This material is not an offer, solicitation or recommendation to purchase any security. Nothing contained in this material is intended to constitute legal, tax, securities or investment advice, nor an opinion regarding the appropriateness of any investment, nor a solicitation of any type.
The general information contained in this publication should not be acted upon without obtaining specific legal, tax and investment advice from a licensed professional. The information, analysis and opinions expressed herein are for general information only and are not intended to provide specific advice or recommendations for any individual entity.
Please remember that all investments carry some level of risk. Although steps can be taken to help reduce risk it cannot be completely removed. They do no not typically grow at an even rate of return and may experience negative growth. As with any type of portfolio structuring, attempting to reduce risk and increase return could, at certain times, unintentionally reduce returns.
Investments that are allocated across multiple types of securities may be exposed to a variety of risks based on the asset classes, investment styles, market sectors, and size of companies preferred by the investment managers. Investors should consider how the combined risks impact their total investment portfolio and understand that different risks can lead to varying financial consequences, including loss of principal. Please see a prospectus for further details.
Indexes are unmanaged and cannot be invested in directly.
Russell Investments’ ownership is composed of a majority stake held by funds managed by TA Associates with minority stakes held by funds managed by Reverence Capital Partners and Russell Investments’ management.
Frank Russell Company is the owner of the Russell trademarks contained in this material and all trademark rights related to the Russell trademarks, which the members of the Russell Investments group of companies are permitted to use under license from Frank Russell Company. The members of the Russell Investments group of companies are not affiliated in any manner with Frank Russell Company or any entity operating under the “FTSE RUSSELL” brand.
Copyright © Russell Investments Group LLC 2019. All rights reserved.
This material is proprietary and may not be reproduced, transferred, or distributed in any form without prior written permission from Russell Investments. It is delivered on an “as is” basis without warranty.