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By HaleStewart April 2, 2017 11:11 am
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US Equity and Economic Review: The Markets Consolidate the Trump Bump

     The BEA released the 3rd revision to 4Q GDP.  Overall growth was 2.1% quarter to quarter and 1% Y/Y.  Let’s analyze the four major spending categories, beginning with personal consumption expenditures:

Overall PCEs increased 3.5% quarterly and 3.1% annually.  All three components grew consistently on a Q/Q and Y/Y basis.  The U.S. consumer is still spending at a solid pace.

Next are investments:

Residential investment is the primary driver of growth while business investment is weak.  Investment in equipment increased a paltry 1.9%.  Moreover, this was the first increase in 5 quarters.  Investment in structures – which decreased in 6 of the last 8 quarters – declined 1.9%.  Intellectual property investment is the only component to increase quarterly.  Y/Y investment rates continue to disappoint.

Third are exports and imports:

Goods exports dropped sharply, falling 6.7%.  This is probably due to the sharp rise in the dollar:

On the other hand, imports rose sharply, again probably as a result of the dollar’s strength.

Finally, government spending rose .2% Q/Q and Y/Y:

Non-defense and state spending increased.

     Looking at the GDP data, we arrive at the following two conclusions. 

  1. Even though wage growth is weak, the consumer continues to spend at a solid pace.  This isn’t surprising – in fact, it’s macro 101. 
  2. However, business investments lackluster pace is concerning.  This graph places that concern into historical context:

Investment in equipment (blue line) increased sharply after the recession.  But this is largely due to an increase following a very large decrease.  Since early 2010, equipment investment has been decreasing.  The same is true for investment in structures (in green).  And while intellectual property investment (in red) is consistently growing, it is doing so at the lowest Y/Y pace in 35 years. 

     Market Overview: the markets continue to consolidate:

The top chart of the SPYs shows this index decreased to the top Fibonacci fan level while the middle chart of the QQQs shows that index remains in an uptrend.  Finally, the bottom chart shows the IWMs which are still consolidating their 20% post-election gain.

     Note that the MACD in all three charts has declined to moderate levels.  This gives all three averages additional upside room to rally.       

     But will they?  The jury is out.  On the plus side, corporate profits are rising and the economy continues to grow at a moderate pace.  On the negative side, the Trump trade appears to be stalling.  After the election, the markets rallied because of the imposition of a united Republican government and its implied pro-business bias.  But after the health care debacle, the markets are no longer sure about how successful this political endeavor will be.  And that increasing doubt has lowered the markets bullishness for now.  

Hale Stewart is a tax lawyer in Houston, Texas with the Law Office of Hale Stewart, where he specializes in domestic and international tax structures and asset protection.  He is also a financial adviser with Thompson Creek Wealth Advisers. 

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