Despite a flattening in consumer confidence in the US, growth in the American economy improved in the third quarter of 2017. GDP for the second quarter was revised upward from 2.2% to 3.1%. Corporate earnings accelerated in the third quarter for the S&P 500 to over 17%. Consumer confidence which hit a 17 year high in March 2017, has since eased back modestly. The change in trend for consumer confidence is difficult to quantify but it is likely due to politics in Washington and the country’s inability to come together since the election.
Historically the country has been sharply divided during election years over the way the country should be led. However, the country has almost always united after the election and worked together to make the best of what the majority voted for during the election. 2016 was another election year where our citizens were sharply divided over the direction America should take going forward. As we are all aware, the majority elected Donald Trump, and in doing so voiced support for the significant change he promised to bring to America. Some of these changes represent a 180° reversal from the way Obama had led the country over the last eight years. Despite the fact that the majority has spoken, the country has not been able to come together, seemingly due to divisive actions and comments from highly visible individuals that don’t understand successful democracies. The country seems to be almost experiencing a revolution between the citizens who represent the way the country has been run for the last 200 years versus the new direction pushed by liberals over the last few decades. The conservatives claim that Obama took America down this liberal path deceptively and without full disclosure, while the liberals believe that the socialistic ways of Europe were bound to overtake the capitalistic ways of America. While it is unclear how this will play out it would seem like the country is more likely to come together than be torn apart. Consumer confidence will likely return to its path of the last ten years as the country unites.
For the most part the consumption engines driving the American economy are up and running at a modest to moderate pace. US exports, while flat the last several months, have been on a higher trend for the last year. The globe is getting better economically and as a result it is consuming more American goods and services. Emerging markets have come to life as manufacturing accelerated in the third quarter due to this global strength. Personal income and wage growth in America continue to show mild improvement. US wages accelerated in the third quarter to $26.55 per hour as unemployment fell to a 10 year low of 4.2%.
While retail sales have been flat, personal consumption experienced mild growth during the third quarter. Government spending has been flat to lower but the data is concealing higher spending that will come over the next few years as US defense contractors accumulate orders now. The same trend is visible in the industrial sector.
China continues on a path of strong growth, albeit slower relative to historical standards. Russia continues to be an island of political problems in the mature part of the world with little to no growth this year.
Inflation continues to remain subdued with strong structural underpinnings that will keep inflation muted for years to come. As a result, central bank policy is accommodative and friendly and will likely remain this way until much stronger growth emerges.
There are not any signs of excess capacity to note, something that occurs regularly near the end of growth cycles.
The outlook for corporate earnings continues to improve. Thus far in 2017 the recovery in earnings growth has continued with first quarter’s growth netting 18.6%, second quarters’ growth logged 16.5%, third quarters’ growth was 10.9%, and fourth quarters’ growth is estimated to be 20.3%.
The leadership in the equity markets this year has correlated quite well with the leadership in earnings in the S&P 500 with the outlier being energy. Technology, financials, healthcare, and industrials have all enjoyed great earnings growth this year and likewise have been the leading sectors in the market. Energy has performed poorly in the market but earnings have now turned upward in Q317 for the first time in several years. Utilities, telecom, and consumer Staples had poor earnings growth and likewise were the laggards in the market.
With interest rates still close to all time lows, and earnings growth reaccelerating nicely, equities still seem to be the asset class of choice.