Economic and Stock Market Commentary for the week of June 27, 2017

The long-running economic expansion continues to have its share of ups and downs. Importantly, though, the good times have not been sufficiently strong to alter the understated character of the expansion, while the soft patches have not been serious enough to put the advance in jeopardy. So, quarter after quarter and year after year, the upturn carries on, with neither the optimists nor the pessimists ever satisfied.

Most recently, the economy has shown its softer side, with data for May showing no change in industrial production, a modest easing in factory usage, and downticks in housing starts and building permits. Our sense is that these are short-term wrinkles, not long-term concerns. Nevertheless, we are tempering our view for the just-ended quarter, with GDP growth now possibly falling somewhat short of 3%.

For now, we think the final half will be decent, with growth, aided in the second quarter by evolving gains in consumer spending and some inventory building, probably holding in the 2%-3% range. Going forward, the consumer should remain an engine of growth, with an assist from rising business investment, especially if tax reform is adopted.

There also are reasons for caution. On point, the Administration’s legislative efforts are a work in progress; the recent Federal Reserve meeting produced the expected monetary tightening, while below-target inflation left questions about the pace of future adjustments; and oil has entered bear market territory, as excess output has pushed prices down sharply. Oil industry profits could follow.

All the while, the bull marches on, with the first half finishing on a sufficiently positive note for the leading averages to likely begin the third quarter holding solid cumulative gains. This formidable performance likely reflects expectations that the Administration will seek a major tax cut in the second half.

Conclusion: Generally supportive economic fundamentals and a prudent Federal Reserve approach are a tough combination for the bears to counter. And as long as this backdrop persists, the accumulation of quality equities would seem a logical course.

Source: Valueline.com