The August reports from Walmart, Target and Lowe’s were all above Wall Street consensus. The United States consumer is alive and well and spending money. The consumer accounts for over two thirds of all economic growth in the United States which means the inverted yield curve likely isn’t flashing a recession signal just yet. The United States is in a good position to fight a trade war with China, especially if President Trump is able to pressure the Federal Reserve to lower short-term interest rates further. The bull market for stocks in the United States seems safe for now.
A sharp decline in interest rates also helps juice the economy as consumers refinance their mortgages and end up with more money in their pocket to spend and stimulate the economy. We are seeing refinancing activity pick up for clients.
What is not to like. The strength in the US dollar is not helping the world economies. The dollar remains higher versus other world currencies making it more expensive for other countries to export or sale their goods to the United States. A weaker dollar will open up other markets to US companies which would also help sustain the current economic expansion. It would also help sales growth of US based multinational companies.
Looking for signs of a recession? Negative economic growth must appear. This seems unlikely in the next 6-12 months. Recall a recession is defined as two quarters of negative economic growth. Plus, few are talking about Boeing. Boeing’s production accounts for 1/2 to 3/4 of a point of economic growth, so getting their 737 Max back online will add even more to the US GDP(Gross Domestic Product) numbers.
Finally, President Trump is talking about a payroll tax cut to further stimulate the economy and adding a more favorable tax structure for capital gains which would further stimulate investment. August and September are traditionally difficult months for the market, but this year may be different especially if the United States and China can strike a trade deal.
We remain concerned about growth outside the United States and all the countries with negative interest rates. Growth in Germany and Japan continues to struggle. Germany announced a stimulus plan recently aimed at pulling their stagnate economy out of a potential recession. Keep your eyes on Germany to see if their stimulus works. Germany has an old stodgy economy and likely will eventually wake up from its declining growth scenario at some point. Japan has similar challenges reigniting their growth due to their work force demographics.
Looking forward, the bull market in the US equity markets looks solid and should continue for another 6-12 months even without a trade deal with China and an inverted yield curve. Retail sales in the United States tells us the consumer is strong. And GDP growth likely will move higher especially if Boeing is cleared to start flying their 737 Max soon.
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