ECONOMIC AND STOCK MARKET COMMENTARY

The industrial sector was continuing to hold its own as we reached the second quarter, with recent data affirming that manufacturing output was up 0.5% in February for a second month in a row. In all, this was the sixth-consecutive monthly gain for industrial production. Also, factory usage in the manufacturing area rose last month, edging further above 75% of capacity. Importantly, utilization remains below the levels that would imply an inflationary bottleneck in production.

The consumer also is showing resilience, with housing starts and building permits on single-family properties ticking higher in February. In all, the public, optimistic due to rising home values and better job opportunities, continues to retain the sentiment needed to keep spending at healthy levels.

So, the business beat should pick up as we get closer to midyear. On point, after an unimposing start to 2017, we would expect growth to accelerate in the second quarter, with GDP gaining well over 2% for the period. A late-winter surge in the leading economic indicators also points to the staying power of this expansion.

Still, we think the Federal Reserve will remain accommodative in its monetary approach, opting to just slowly raise interest rates. All told, the Fed, which lifted borrowing costs in mid-March, may vote in two additional rate hikes this year and three more in 2018, when the economy will, presumably, be growing at a faster pace, especially if tax cuts and new spending initiatives are adopted.

Things are going less smoothly between Congress and the White House, with both branches trying to reach a deal on the vexing issue of health care. Should that gulf not be bridged, the effect on other legislative efforts could be substantial and affect investor sentiment.

Not surprisingly, market volatility is on the rise, with the equity indexes experiencing recent wide swings, as sentiment waxes and wanes, in large part on the ebb and flow of news out of Washington. Meanwhile, even as the averages still are at near record levels, challenges remain, most notably in the areas of legislative reform, global dealings, and the upcoming earnings reporting season.

Conclusion: Overall, the biggest challenges are the elevated P/E ratios, which leave little room for disappointments or missteps.

Source: Valueline.com