Economic and Stock Market Commentary for the week of August 8, 2017

The widely expected second-quarter economic comeback arrived on schedule, as a report issued late last month showed that the nation’s gross domestic product had increased by 2.6% in the second quarter, up from a listless 1.2% pace tallied in the first three months. Higher consumer spending and a smaller drawdown in inventories (shrinking inventories reduce GDP) accounted for much of the improvement.

We believe growth will remain on that higher plateau in the second half. Our optimism reflects recent gains in durable goods orders, housing construction, and new home sales, as well as further resilience in manufacturing. July’s pickup in consumer confidence also augurs well, although an extended slump in U.S. car sales and slowing activity at many retail counters temper our optimism.

Pushing ahead more aggressively will be a challenge. Indeed, it likely will take legislative success in a range of areas, from healthcare, to tax reform, to infrastructure rehabilitation to boost growth measurably above 2.5%. To date, such strides have eluded the Republican Administration.

The Federal Reserve appears to be on board. Our sense is that the bank will pursue a cautious monetary approach, both with respect to raising interest rates and winding down its other stimulus efforts, so as not to disrupt the extended, but still at times fragile, business expansion. Expectations that the Fed will, indeed, be able successfully to undertake modestly restrictive policies have been pivotal in helping Wall Street fashion another winning year to this point.

Meanwhile, Corporate America is doing its part, by issuing largely supportive earnings reports. In all, about three-quarters of the companies posting second-quarter results to date have surpassed expectations. That performance also is helping shore up investor confidence.

Still, the bulls have faced some tests recently, with selective earnings disappointments, uneven economic results, and heightened political discord giving investors pause at times. Nevertheless, the prominent indexes have continued to make new record highs.

Conclusion: We still believe that the careful accumulation of quality stocks with strong financials and good earnings support is the best way to proceed in a generously capitalized stock market.

Source: Valueline.com