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There’s a lot happening to impact the markets these days. Let’s cover some key economic data, stocks that may see a fundamental boost from Hurricane Florence, and we’ll reiterate our view that trade tantrums between the US and China will likely not amount to much of a negative impact on global economic activity, despite huge headline numbers.
By Kris Rosemann
Famed investor Peter Lynch has been attributed with the quote, “If you spend more than 13 minutes analyzing economic and market forecasts, you’ve wasted 10 minutes,” so let’s take a quick look at some recent economic data releases and what they might mean for the markets moving forward.
Most market observers continue to expect the Fed to raise interest rates for a third time this year later this month as expectations for overall US economic growth remain strong, and the 10-year Treasury yield continues to hover around the 3% mark. US industrial production rose 0.4% in the month of August thanks to a 4% rise in motor vehicles and auto parts production (CARZ). Other pockets of strength included mining production and utilities output, and capacity utilization rose slightly to 78.1%.
Excluding the strength of the auto space, industrial production was unchanged in the month of August, forcing some observers to speculate over the impact of the escalating trade war with China (FXI, MCHI) on the US manufacturing sector, which accounts for roughly 12% of the US economy. Other manufacturing indicators offer a more upbeat view of ongoing demand strength both domestically and internationally.
Though the US auto sector’s industrial production was a strong point in August, consumers cutting back on auto and clothes purchases helped lead to the smallest gain in six months for US retail sales (XRT). An upward revision to July’s reported figure helped keep expectations for strong overall economic growth intact for the third quarter. Core retail sales, the grouping most closely tied to the consumer spending component of GDP, rose 0.1% in August, but July’s figure was revised to 0.8% growth from 0.5% previously. Despite the slowdown, the outlook for consumer spending remains solid thanks to a tightening labor market and the resulting wage growth.
Growing business inventories are also expected to help boost US GDP in the third quarter as businesses stock up to meet strong domestic demand. Autos were a key component of the 0.6% rise in business inventories in July, and a higher than expected increase in consumer sentiment supports the positive outlook for economic growth in the third quarter. The University of Michigan consumer sentiment index leapt 4.8 points from the month of August to 100.8 for the month of September–the second-highest level since 2004, behind only March 2018–as a decline in inflation expectations offset concerns over lessening expectations for declining nominal income gains.
The Atlanta Fed is now projecting 4.4% US GDP in the third quarter, which is up from its 3.8% projection just a few days ago. The “nowcast” estimate provided was driven higher by an increased real consumption expenditures assumption following the retail sales and industrial production reports released September 14.
Hurricane Florence and its aftermath will have an impact on the Carolinas during the month of September, but we would expect October to be a strong rebuilding month for much of the East Coast, offering considerable opportunity for the home improvement retailers (PKB). This could drive a nice bump in economic activity and a surge in waste collection volumes during the calendar fourth quarter, benefiting many of the waste haulers (EVX, PZD). Transportation-related equities, including Hertz (HTZ) and Avis Budget (CAR), could see a revenue bump in the last month of the calendar third quarter as many moved from the East Coast to avoid the storm’s devastation.
Moody’s estimates that property damage from Hurricane Florence will be in the range of $17-$22 billion and that the impact the third-quarter GDP will be minimal, pressuring growth by just 0.2 percentage points. The bigger question as it relates to GDP rests in the White House’s trade policy with China, however, though we maintain our view that any trade tantrums between the two countries will likely have but a modest impact on the pace of global economic growth. We believe both country’s leaders want open and fair trade, and we don’t think either will do anything irrational to cause a global economic disruption.
Rental & Leasing: CAR, MGRC, PSA, R, RCII, TGH, UHAL, URI
Environmental Services: CLH, CVA, CWST, DAR, ECOL, RSG, SRCL, WCN, WM
Related ETFs: SPY, DIA, QQQ
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Kris Rosemann does not own shares in any of the securities mentioned above. Some of the companies written about in this article may be included in Valuentum’s simulated newsletter portfolios. Contact Valuentum for more information about its editorial policies.