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Betting on America: Stocks Soar on U.S. GDP Data

By John Persinos on June 6, 2018

One of my favorite literary quotes was penned by the great American writer F. Scott Fitzgerald. In his 1936 collection of essays titled The Crack Up, Fitzgerald wrote:

“The test of a first rate intelligence is the ability to hold two opposed ideas in the mind at the same time, and still retain the ability to function.”

The main stock indices sharply rose Wednesday, with the Dow Jones Industrial Average breaching 25,000 and the Nasdaq notching another record high. Bank and tech stocks led the rally.

But to this bullish surge, let’s apply Fitzgerald’s timeless quote. As an investor, you should find encouragement from positive trends. At the same time, you shouldn’t kid yourself about existing dangers. In your mind, optimism and caution must co-exist.

First, the upbeat trends. Wall Street was buoyed today by robust forecasts for U.S. gross domestic product (GDP) growth in the second quarter.

Goldman Sachs (NYSE: GS) said Wednesday that it raised its second-quarter tracking model for U.S. GDP growth to 3.7%, due to recent jobs and manufacturing data that have beaten expectations. Also today, the Atlanta Federal Reserve announced that it expects a sizzling 4.5% GDP gain in Q2.

Now, let’s examine two major dangers: inflation and trade conflict.

The Labor Department reported Wednesday that hourly compensation accelerated at a 3.3% rate in the January-March quarter. Compensation rose at a 2.9% pace in the fourth quarter and increased at a year-over-year rate of 2.6%.

Unit labor costs, the price of labor per single unit of output, rose at a rate of 2.9% in the first three months of the year, rather than the 2.7% rate initially reported in May. Labor costs rose at a rate of 2.5% in the fourth quarter. They were up by a year-over-year rate of 1.3%.

The upshot: inflation poses a genuine threat.

Inflation can serve as the canary in a coal mine, warning that the business cycle is reaching the end of an expansionary period.

At the beginning of the cycle, inflation is typically low. It was virtually non-existent in the immediate wake of the 2008 financial crisis. But inflation picks up as the economy grows. People have more money to spend; companies sell more goods and services at rising prices, earning higher profits; more people find work at higher pay.

As price pressures build steam, the Federal Reserve is compelled to more aggressively raise interest rates. Higher rates dampen economic growth and kill bull markets.

Since World War II, recoveries have lasted about eight years. The current economic expansion began in June 2009. Do the math. We’re overdue for a downturn.

Wall Street is ebullient over the recent overhaul of the U.S. tax code, but these massive tax cuts add to the federal deficit in the ninth year of an expansion. That’s inflationary.

Trading punches…

In its latest Global Economic Prospects report, published Tuesday, the World Bank warned that the brewing trade war could set the world economy back to 2008 in terms of global trade levels.

The western alliance remains under serious strain as President Trump infuriates traditional American allies such as Europe, Canada and Mexico by imposing trade sanctions.

The trade tit-for-tat continued today. European Union members Wednesday signaled support to a European Commission plan to impose 25% duties on up to 2.8 billion euros ($3.3 billion) of U.S. exports in response to Trump’s tariffs. EU exports that are now subject to new U.S. tariffs are worth 6.4 billion euros.

The European Commission said the duties against U.S. exports would start applying in July. U.S. products on the list include blue jeans, orange juice, bourbon, motorcycles, and various steel products.

These intensifying tensions between the U.S. and its longtime trading partners provide openings for Russian President Vladimir Putin. The Russian autocrat seeks the removal of sanctions and a freer hand for military adventurism. He increasingly enjoys an unfettered ability to make global mischief, a geopolitical risk that Wall Street underestimates.

Regardless of your political leanings, you need to remain coldly rational about your holdings. Never get emotionally attached to any one investment or desired political outcome.

Tune out the Beltway pundits and listen instead to Warren Buffett, who offers this famous piece of advice: “You want to be greedy when others are fearful and fearful when others are greedy.”

A catalyst for a market downturn, in the form of a “black swan,” lurks on the horizon. What could it be? No one knows; that’s why it’s called a black swan. Keep plenty of cash on hand, for future bargain hunting. When fear returns, you want the wherewithal to be greedy.

Wednesday Market Wrap 

  • DJIA: +1.40% or +346.41 points to close at 25,146.39
  • S&P 500: +0.86% or +23.55 points to close at 2,772.35
  • Nasdaq: +0.67% or +51.38 points to close at 7,689.24

Wednesday’s Big Gainers

Retailer beats on earnings.

Analysts bullish on construction equipment firm. 

Metal products maker impresses on earnings.

Wednesday’s Big Decliners

Analysts skeptical of biotech’s clinical trial.

Food producer hit by profit-taking after run-up.

Solar sector crushed as China imposes new restrictions.

Letters to the Editor

“Are bank stocks poised for further gains in 2018?” — David C.

Financial services will continue to boom under Trump, as his anti-regulatory stance guts the oversight rules that bankers have hated for years. The tax cut bill also is manna for banks, because they tend to take fewer deductions and the bill slashes the top corporate rate.

Questions about sector investing? Drop me a line:

John Persinos is managing editor of Personal Finance and Radical Wealth Alliance, as well as chief investment strategist of Breakthrough Tech Profits.


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