The U.S. economy continues to muddle through, with the first reading of 2nd quarter GDP coming in at a disappointing 1.2%. This was only slightly above the first quarter’s revised rate of 0.8%, and well below the consensus forecast of economists, who expected growth of about 2.5%. The consumer was strong, with consumer spending rising 4.2% in the quarter and contributing 2.8% to GDP, but this was offset by inventories and fixed investments. As the inventory drag lessens and if the consumer remains strong, GDP in the second half should improve. The low GDP number makes the possibility of a Fed rate increase in September highly unlikely. However, at the Fed’s June meeting, they indicated that a rate increase before the end of the year is still on the table. Housing remains strong as low borrowing costs and a low unemployment rate encourage home buying. Purchases of new single-family homes rose 3.5% in June, beating market expectations and reaching the highest level of growth since February 2008. Future wage growth should continue to support this trend. Wages grew 2.6% year-over-year—one of the fastest paces since the current recovery began. The jobs numbers continue to be encouraging, with employers adding 287,000 new jobs in June after a disappointing number in May, while the unemployment rate remains below 5%. These figures, coupled with strong retail sales, high consumer confidence and continued low gas prices, point to a continuation of strong consumer spending, which should boost corporate bottom lines in coming quarters.
The earnings season is off to a strong start. Of the 63% of S&P 500 companies that have reported so far, 70% have beat earnings estimates. In mid-July, the S&P 500 & DJ Industrial Average hit new all-time highs and remained above those levels through the end of the month. Utilities & Telecom are the best performing sectors YTD (+22.6% & +26.1%, respectively) as investors search for yield anywhere they can find it. Steady economic growth and the lack of a meaningful rate increase in the near future has contributed to the boon in stock prices, which continue to look relatively attractive when compared to bond valuations. Oil has ceased to be the primary driver of stock price moves after an almost unprecedented correlation with the equity market in 2015 and earlier this year. WTI crude has fallen nearly 20% since hitting over $50/barrel in early June, finishing July at $41.60/barrel. The decline in oil prices caused energy stocks to lose ground in July, but failed to cause a broad market drop.
The yield on the 10-year treasury hit a historical low of 1.34% on July 6th as investors continued their flight to safety in the wake of the Brexit vote. It improved to 1.46% by the end the month after the Fed indicated that a rate hike remains possible later in the year. Globally, central banks continue to provide economic stimulus and negative interest rate policy has become quite common, causing very high foreign demand for U.S. fixed income. As rates have fallen this year, returns in the fixed income markets have rivaled equity returns, especially in the intermediate and long -term government and investment-grade corporate sectors. High yield bonds have exhibited the highest YTD return of 12.08% as investors continue to be willing to take on credit risk in an effort to enhance yield.