Economic and Stock Market Commentary

Things are coming together for the economy. To wit, after a restrained first quarter, in which the gross domestic product rose by just 0.7%, more reassuring reports have been issued. Of note, consumer confidence and non-manufacturing both rose in April, while job growth accelerated, reversing a slowing uptrend in March.

The improving employment backdrop is a key to the brightening outlook, as solid job growth can help underpin consumer spending. As to the jobs issuance, April saw 211,000 positions added nationwide, the third time in four months the total had exceeded 200,000. In all, even including March’s gain of just 79,000 jobs, the average monthly rise so far in 2017 is a solid 185,000. Also, hourly wages continue to rise; the average workweek is gaining; and the jobless rate is down to 4.4%. Assuming a continuation of these better trends, GDP growth could approach 3% in the current quarter.

There also has been some movement in Washington, where the Republican-led House recently passed a new health-care bill, which now must go before the Senate where it will likely undergo major changes. Going forward, with this possible win, the path could be easier for tax reform and greater infrastructure spending. Should the President’s efforts in these areas prove successful, the consequent pickup in economic growth later this year could well be extended into 2018.

All of this suggests the odds are increasing that the Federal Reserve will raise interest rates at its June meeting. In total, the Fed might hike borrowing costs twice more this year and two to three times in 2018, especially if growth quickens, as we project. Such a scenario would give the central bank maneuverability once a cyclical downturn eventually ensues.

The bulls remain in charge for now, as they continue to hold sellers at bay by buying on even brief dips in the equity market. As a result, P/E ratios remain high and the risks, while not excessive, are still appreciable.

Conclusion: Market trends are hard to break and the fundamentals appear strong enough to carry stocks higher. Yet, the lofty level of the equity market suggests some caution is warranted.

Source: Valueline.com