Economic and Stock Market Commentary for the week of July 11, 2017

The third quarter is likely to begin in much the same way that the second three months ended. That is, we expect some reports to show increasing economic strength, while others suggest the economy is proceeding less smoothly. On point, figures issued in the past two weeks noted that personal income had risen for a third straight month, while consumer spending’s growth had slowed, after back-to-back strong gains. Further, recent consumer sentiment readings were mixed, but manufacturing’s gains were accelerating, with encouraging strength in new orders, production, and employment.

This checkered pattern is likely to continue for awhile. The trends in place on the consumer side are reflective of the unevenness in the economy at large. To wit, the latest data on home sales showed gains in key housing categories, with only property shortages preventing even stronger monthly results. On the other hand, figures issued early this month noted additional slippage in car sales, with a notable sputtering in demand for small cars and sedans. Such choppiness may hold GDP growth to 2.5%, or so, in the second half.

It is unclear whether the economy will pick up much in 2018, as at least some of the momentum we had anticipated was predicated on the passage of business-friendly health care and tax reform legislation. True, such revisions still are possible, but the current stalemate in Washington calls into question the timetable for such change.

Meanwhile, we would expect the Federal Reserve to remain wedded to a slow interest rate progression, especially as inflation remains below the central bank’s target, and the long business expansion is proceeding on a less-uniform path than seemed likely just weeks ago. In all, we now expect just one rate hike the rest of the way in 2017.

Choppiness also is beginning to be seen in the stock market, where in the past several weeks we have had additional records set, while having to endure a few brief pullbacks. All the while, the investment fundamentals have remained sound.

Conclusion: We think a carefully grounded investment strategy emphasizing the accumulation of quality names with good earnings support is a prudent approach right now.