As expected, markets did close out the month, last week, with a modest drift higher - fueled by earnings. The Nasdaq (+0.14%) and S&P 500 ticked higher while the Dow Industrials slipped 0.14%. Volume on both the Nasdaq (+7.67%) and NYSE expanded (+3.81%). We are a in a confirmed uptrend as markets continue that earnings fueled drift higher. I expect August to bring an end to our monthly gains for US equity indices and would not be at all surprised to see an event trigger some elevated volatility. Keep an eye on crude as it continues to drift lower as a result of supply glut concerns.
Secular economic stagnation as corporations mine for efficiencies:
U.S. equity investors received a bit of an unwelcome jolt of reality on Friday last week when it was learned that the initial reading of the U.S. economy’s rate of expansion in Q2 was a rather underwhelming 1.2% annualized, according to the Commerce Department. Consensus expectations were calling for something closer to 2.6% annualized or roughly twice the actual. Further underscoring the anemic performance of our economic activity over the past three quarters was provided by a look back into Q1 of 2016 (0.8%) and Q4 of 2015 (0.9%).
Interestingly, consumer spending in the most recent period was a rather robust 4.2% annualized. With the “official” unemployment rate suggesting near full employment in the US economy for the first time since the financial crisis and consumer spending clearly outperforming the top line reading of economic activity, investors have to ask a very simple, dare I say basic, question. Why is U.S. GDP effectively flat over the past three quarters? Shouldn’t consistent employment gains, robust consumer spending and improving consumer sentiment measures all add up to something more enticing that what we have been receiving? Yes, except for one thing.
For several quarters many on Wall Street, including myself, have pointed out that US corporate revenue growth has continued to languish and in many critical cases contract despite modest positive quarterly corporate earnings results. The lack of corporate revenue growth has acted as a direct lag on business investment (cap-ex) and slowing inventory accumulation. As GDP is the broadest measure of aggregate economic activity of the economy, that factor has had a significant impact on the lack of GDP expansion that we have seen in recent quarters.
Clearly the anemic GDP data that has emerged in recent quarters is nothing new. In fact our recovery from the financial crisis is the first time since WW2 that a post recession recovery has failed to reach a 3% annual rate of growth. That is historic. What makes the comparison even more dramatic is the fact that the Federal Reserve has deployed more measures to combat weak economic growth, not to mention contraction, than in any period in modern economic history.
This recovery has been different - to put it modestly. In fact, on September 8, 2008, I unexpectedly and rather prophetically called for exactly that. See the link from that morning below. That morning my quote was plastered on every Bloomberg terminal around the globe as markets attempted to open after a weekend that saw several venerable firms collapse.
“The tectonic plates beneath the world financial system are shifting, and there is going to be a new financial world order that will be born of this.” Bloomberg 09/15/2008
The world has changed and many of those changes have led to a new world order of sorts. One indication of just how “new” this financial order of ours and how different our recovery has been is seen in the complete lack of dynamic economic activity following the financial crisis. We have seen institutions struggle and in many cases fail. We have seen Wall Street, a misunderstood euphemism, radically transformed by regulation, recapitalization, disruptive technology and by a world that in many cases has found that the surety of recovery is no longer a bankable theme.
We struggle forward. U.S. consumers with little income growth, student debt loads in the trillions, stalled family formation, U.S. government debt approaching 20 trillion dollars, unprecedentedly bloated central bank balance sheets and a lack of fiscal stimulus so needed to balance years of monetary accommodation.