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Friday’s GDP Tells Us No Recession in Sight

CAMS Weekly View from the Corner – Week ending 7/26/2019

July 29, 2019

In recent editions we have been sharing our confusion with the recession obsession that has appeared in the general economic narrative.  The significance to our focus is simply the absolute need for our highly valued markets to continue to experience overall economic growth to support their elevated levels.

A month ago we offered how the 1st Quarter GDP report was stronger than the 4th Quarter of 2018 (a non-recessionary type of storyline) and the soon to be released 2nd Quarter would be positive albeit slower than said 1st Quarter GDP.

All told, in any healthy and growing economic backdrop there is always an ebb and flow whereby growth continues but doesn’t grow in a straight upward line.  Our current economic backdrop nearly defines this general economic growth description.

This past Friday the Bureau of Economic Analysis (BEA) released the GDP results for the 2nd Quarter of 2019.

The consensus expectation was for an annual growth rate of 1.8% – reflecting slower but positive growth.

The actual result came in stronger than expectations to the tune of 2.1%.  For perspective, 4th Quarter 2018 – 2nd Quarter 2019 came in at 2.2%, 3.1% and now 2.1%.  Sound recessionary?

It Gets Better

The Consumer in all of us understands when the economy is getting more difficult our ability to consume at high levels is challenged.  Simply said, collectively, our consumption slows down notably.

Within Friday’s GDP release the measure for consumption is known as the Personal Consumption Expenditure (PCE) category.  This measure was rock solid strong at 4.3% reflecting the 2nd strongest growth rate in this category in the previous 4 years.

Stronger than expected overall GDP growth, rock solid Consumption levels and an on-going employment market that has more job openings offered than they are people to accept them.  Unemployment Claims continue to post multi-decade lows.  Sound recessionary?

Federal Reserve

This coming Wednesday the Federal Reserve will inform us of their decision on interest rate policy.  In recent weeks they have offered a message to market participants they will be lowering interest rates to (you guessed it) help prevent recession.

At this stage said rate cut has been built into current stock prices and the Fed will surely not retract regardless of the above economic growth results.  If they do not cut we should expect a negative reaction from stock market participants that will show up in lower prices.

The key question is will the FED offer more rate cuts are to be expected or will they walk away from that type of message in light of the on-going growth displayed?  Market participants will be weighing this answer into their forward pricing of markets so the result will be important.

I wish you well…

Ken Reinhart

Director, Market Research & Portfolio Analysis

Portfolio Manager, CAMS Spectrum Portfolio

Footnote:

H&UP’s is a quick summation of a rating system for SPX9 (abbreviation encompassing 9 Sectors of the S&P 500 with 107 sub-groups within those 9 sectors) that quickly references the percentage that is deemed healthy and higher (H&UP).  This comes from the proprietary “V-NN” ranking system that is composed of 4 ratings which are “V-H-N-or NN”.  A “V” or an “H” is a positive or constructive rank for said sector or sub-group within the sectors.

This commentary is presented only to provide perspectives on investment strategies and opportunities. The material contains opinions of the author, which are subject to markets change without notice. Statements concerning financial market trends are based on current market conditions which fluctuate. References to specific securities and issuers are for descriptive purposes only and are not intended to be, and should not be interpreted as, recommendations to purchase or sell such securities. There is no guarantee that any investment strategy will work under all market conditions. Each investor should evaluate their ability to invest for the long-term, especially during periods of downturn in the market. PERFORMANCE IS NOT GUARANTEED AND LOSSES CAN OCCUR WITH ANY INVESTMENT STRATEGY.

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