4/27/18 – Interest Rates, Earnings and Economic Growth

Multiple issues helped created another volatile week for stocks. Interest rates came back to the forefront as the 10-year Treasury touched 3% for the first timein four years. While still a very low level historically, the 10yr traded under 1.4% less than two years ago and 2.4% at the beginning of the year. More interestingly, the 2-year Treasury is approaching 2.5%. That’s more than double the yield at the beginning of the year. That provides some investors an enticing opportunity to reallocate away from stocks and into bonds, putting some pressure on stock prices. For the week, the Dow declined 0.6% while the S&P 500 was essentially flat from last Friday.

First quarter economic growth came in at a better-than-expected 2.3% annualized rate in the initial report. Economists were expecting a 2% growth rate. This is sharply lower than we’ve seen over the past three quarters, but the first quarter is typically lower due to some seasonal adjustments. Higher economic growth has been a key target of the Trump administration. As of now, growth approaching 3% this year seems possible although there were some concerning aspects of this report. Consumer spending was the weakest in the last five years. Consumers make up roughly two-thirds of overall gross domestic product, so any prolonged weakness in consumer spending will cause a hit to economic growth. Read More

Companies have consistently exceeded earnings expectations this quarter. Earnings were expected to be strong given the tax cuts and a weak dollar, but have so far been even better than analysts estimated. While the numbers have been good, the stock market reaction has been all over the place. This highlights a couple important points. During this week we’ve seen headlines such as “Strong Earnings Not Enough to Make Investors Happy” and “Markets Surge, Powered by Strong Earnings.” These are completely opposite headlines in back-to-back days. The point is day-to-day market moves often have very little to do with the fundamental strength of companies or the economy. The key is to try and ignore the short-term noise and buy quality companies with a long-term horizon.

Oil decreased slightly this week, declining 0.4% to close at $67.97/barrel. The yield on the 10-yr Treasury held steady at 2.96% after topping 3% earlier in the week. The average rate on a 30-yr fixed rate mortgage moved sharply higher to 4.58% from 4.47% a week ago. This is the highest average mortgage rate in over four years.

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