Economic and Stock Market Commentary for the week of July 26, 2017

The consumer is retrenching. First, it was the carmakers reporting lower sales for June and revising their full-year forecasts downward. Then, it was the retail sector that posted declining activity, with slippage in receipts at restaurants, sporting goods outlets, and department stores. Finally, a recent issuance showed a drop in sentiment among the public. Taken together, the consumer situation is less than idyllic and will limit GDP growth this half.

Elsewhere, much of the picture is still brightening. Not only have manufacturing and non-manufacturing strengthened, but recent weeks have brought reports of industrial production gaining nicely in June (the second solid rise in three months, and the fifth uptick in a row, overall); capacity utilization inching higher at the nation’s factories; and housing starts and building permits rebounding solidly last month.

On balance, we think the economy will hold its own this half. Our sense is that business activity, which slackened early in 2017, will strengthen during the third and fourth quarters. This should enable GDP growth—even with some retracement on the consumer side—to average 2.5%, or so. We think this sturdier performance will continue into 2018.

Still, there are loose ends. And these have the potential to muddle things next year. First, there is the Federal Reserve, which must successfully unwind years of extensive monetary accommodation, without breaking the economy’s forward momentum. Then, there is fiscal policy, as the Trump Administration seeks to retake the reins following the failed attempt by Senate Republicans to replace the Affordable Care Act at this time. How this all turns out will have a bearing on the economic outcome in 2018.

Meanwhile, Corporate America is stepping it up, with earnings reports for the second quarter largely exceeding expectations thus far. A solid showing on this front is critical for the stock market, given the extended P/Es in place.

Wall Street is still on board. To wit, recent stock market action favors the bulls, save for a few bumps along the way, as record highs are being set regularly.

Conclusion: We think the careful accumulation of quality stocks remains a prudent approach, while keeping in mind the elevated risks of a pricey market.

Source: Valueline.com