Economic and Stock Market Commentary for the week of July 18, 2017

The good news is coming on several fronts as the third quarter proceeds. First, the Institute for Supply Management reported a jump in manufacturing in June, boosted by a surge in new orders. Then, that trade group issued data showing a pickup in non-manufacturing, led, as well, by strengthening orders. Thereafter, the Labor Department released its employment figures for June, which contained a positive surprise in job growth for that month, upward revisions for April and May, and a further modest rise in wages.

Encouraging as these trends are, we would not overreact to a few data points. That’s because this upturn has been notable for its inconsistency, with a few strong reports— such as we’ve outlined above—often being followed by lackluster issuances, such as we saw late in the second quarter. All the while, the expansion continues to proceed in underwhelming fashion. The absence of persisting excesses likely explains the upturn’s longevity.

We think the months ahead will feature more of the same, that is, additional understated growth with few constants. Overall, that checkered pattern should yield GDP growth of 2.5%, or so, this half. A modestly better performance is still possible in 2018, but perhaps only if more of the business- friendly proposals being advocated by the Trump Administration are enacted.

The Federal Reserve is unlikely to be moved by the recent strength in manufacturing and employment. Our sense is that the Fed will continue to tighten the monetary reins in regularly spaced intervals over the next 18 to 24 months.

The next hurdle likely will be second quarter earnings season. Such reporting, which is now under way, should make for generally good reading, with many more companies than not continuing their pattern of posting positive earnings surprises.

The stock market retains its resilience, with equities extending their gains on good news and often rebounding quickly when the tidings disappoint, whether such ill winds relate to the economy, global matters, or domestic political events. That sequence suggests decent further staying power by the bulls.

Conclusion: We believe the careful addition of quality stocks with strong fundamentals is a worthwhile investment strategy at this time.

Source: Valueline.com