VIA NOVA UPDATE: Facts and fears battled to a draw.

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  • The S&P 500 was essentially flat but held above the 2800 level.
  • Housing starts lagged but labor, spending and business reports were strong.
  • No progress on trade but plenty of Trump headlines.
  • More good news from Q2 earnings season.
  • Week ahead: Lots of earnings reports are due as well as the first estimate of Q2 GDP.

The S&P 500 was essentially flat but held above the 2800 level.

Facts and fears battled to a draw in the latest week, as good economic and earnings reports went toe-to-toe with escalating trade tensions.  The S&P 500 added less than a point but remained above the technically and psychologically important 2800 level.  Financials led other sectors helped by strong earnings and rising bond yields, while energy stocks trailed due to lower oil prices.  Small cap stocks, which are somewhat more sheltered against trade turbulence, outperformed the S&P 500.  International stocks also rose, but emerging markets fell.

Bond yields rose again lifting the yield on the 10-year Treasury note to 2.89% but remain historically low.  The higher yields pushed down bond prices, and the Bloomberg Barclays Aggregate Bond Index slipped a modest -0.03%.  In other markets, inflation-hedging investments – real estate, TIPS, oil and gold – all declined.  The value of the dollar dropped -0.29% for the week, leaving it nearly flat from a year ago, but the greenback surged against the Chinese yuan.

Housing starts lagged but labor, spending and business reports were strong.

The economic facts remain strong.  We’re at the end of the ninth year of this economic expansion, now officially the second longest business cycle expansion in the post-war period. At 108 months, we just surpassed the 1961-1970 expansion (106 months).  The next milestone is 120 months, the length of the 1991-2001 expansion.  It’s looking increasingly likely that this expansion will continue for more than a year and will become the longest since World War II.  The latest round of reports bolstered that chance.

The economic reports covered a wide range of sectors, and for the most part, were quite healthy.  While June housing starts missed estimates, reports covering spending, the labor market and business activity all beat estimates.

As the consumer goes, so goes the economy.  The 0.5% rise in June retail sales was good news for the market.  Not only did retail sales beat expectations, May’s increase was revised sharply higher.  As a result, sales increased at an 8.9% annual rate in the second quarter and lifted the expected Q2 GDP growth rate up to a very healthy 4.5%, according to the Atlanta Fed’s GDPNow estimate, more than twice the pace of the first quarter and well above the 2.2% rate so far in this expansion.

On the job front, the level of initial jobless claims fell to the lowest absolute level since 1969 signaling a strong labor market.  The Philly Fed business index for July, a proxy for national activity, rose again, and June industrial production beat the consensus.  Regarding future economic momentum, the index of leading indicators increased another 0.5%, ahead of the expected 0.4% increase, pointing to continued growth.

No progress on trade but plenty of Trump headlines.

President Trump’s meeting with Vladimir Putin created a firestorm of negative response, but did little to influence the stock market’s direction.  Tweets on trade and an offhand interview comment threatening tariffs on all of China’s imports added to the escalting threats.  China apparently is making efforts to steer Chinese consumers away from U.S. products and devalued its currency as non-tariff responses to the U.S.  In a shift from historic tradition to avoid comments on either Federal Reserve policy or the value of the dollar, President Trump said that, while he supports the independence of the Fed, he hopes they will not raise interest rates aggressively.  He also said the recent strength of the dollar was not positive, and blamed the Chinese for devaluing their currency.

More good news from Q2 earnings season.

The second quarter earnings season is off to a great start.  Nearly 84% of the companies in the S&P 500 that have reported so far beat analyst expectations compared to a long-term average of 64%, according to Thomson Reuters.  Second quarter earnings are now expected to increase a very healthy 22.0% from Q2 2017.  Almost three-quarters of companies also beat revenue estimates which is above the long-term average.  Profit margins are at record highs, according to FactSet, thanks in large part to the cut in the corporate tax rate.  The strong increase in earnings so far in 2018 combined with sluggish stock prices lowered stock market valuations.  The forward four-quarter (3Q18 – 2Q19) P/E ratio for the S&P 500 is 16.5X, down from over 18.5X early in the year.

Week ahead: Lots of earnings reports are due as well as the first estimate of Q2 GDP.

This week will see the most S&P 500 companies report earnings of the season.  We’ll see if the good news continues.

On the economic front, June durable goods orders are expected to show continued growth reinforcing the trend of accelerating capital spending.  Also, the first estimate of second quarter GDP is due and the consensus is calling for an impressive 4.3% annualized increase, nearly double the pace of growth so far in the current expansion.