Last week, the markets took a brief nosedive. From its high on May 16 to its low on May 18, the S&P 500 Index shed more than 1.6%. The index would rebound heading into the weekend, but the S&P 500 would still close lower for the week.
Politics drove this latest market scare. On May 17, the Department of Justice formally appointed former FBI head Robert Mueller as a special prosecutor to look into ties between Russia and President Donald Trump’s election team.
Politics — or rather the promise of corporate tax cuts and deregulation — also helped drive the market’s impressive “Trump bump” rally, one that has seen the S&P 500 gain nearly 15% since the November election.
But it wasn’t politics that helped the markets recover so quickly from last week’s scandal-driven crash. The investigation is still on, and, as such, it remains questionable as to whether Trump’s policies will be implemented.
With Washington in turmoil, Wall Street is returning to its roots for support for the current bull market rally…
“It’s the Economy, Stupid”
The 1992 catchphrase is nearly as insulting as it is true. With Trump’s plans for tax cuts, deregulation and massive infrastructure spending now in limbo, Wall Street has found a friend in the recent slew of positive economic reports. And there have been more than a few to crow about:
Housing Data: According to the National Association of Home Builders, the monthly confidence gauge rose 2 points to 70 in May, the second-highest level since the recession. And while April new home sales dipped a bit more than expected (due, in part, to the Easter holiday season), sales for both March and February were revised higher, bringing the three-month average to 606,000 — just shy of March’s high of 611,000. Existing home sales, however, painted a slightly different picture, as April sales appeared more constrained by limited supply rather than by demand. Overall, the trend for both new and existing home sales remains higher … and all this despite rising interest rates from the Federal Reserve and higher mortgage lending costs.
Consumer Strength: Consumer sentiment is also on the rise despite the political turmoil and rising interest rates. The University of Michigan reported last week that its consumer confidence gauge leapt to 97.7 in May from 97.0 in April as consumers focused on buying household goods to fill those newly acquired homes. Fueling that confidence is a continued drop in unemployment. Specifically, May real unemployment, or the U-6, tagged its lowest level since the recession began. Furthermore, last week’s initial jobless claims continued its own downward trajectory, hitting its lowest level since 1988.
Manufacturing Data: Probably the sector most affected by Trump’s economic plans, manufacturing remains a point of contention in the U.S. economy. For instance, the Richmond Fed Manufacturing Index logged its seventh consecutive month of growth in May, but just barely, while the Philadelphia Fed reported exceptional growth for the region. But growth is growth, and the overall outlook for U.S. manufacturing remains robust, with the Fed pointing out last week that April industrial production rose 1% — its fastest rate since February 2014.
Leading the Charge
We’re already seeing the effects of the improving U.S. economy. According to FactSet data, 75% of S&P 500 companies have beaten Wall Street’s earnings estimates, with 64% topping revenue projections. Furthermore, the blended earnings growth rate is 13.9% — the highest year-over-year growth since the third quarter of 2011. And if April’s leading economic indicators have anything to say about it, the economy is picking up steam at a faster rate than many economists were expecting.
The bottom line here is that, once again, despite Washington’s scandals and relative inaction, the U.S. economy is on track for a solid recovery. So, while the mass media headlines are predicting doom and gloom, the reality just doesn’t measure up. That said, D.C. does create its fair share of headaches for those looking to grow their wealth.
That’s where my colleague Paul comes in. Paul’s Profits Unlimited service identifies market opportunities while limiting risk and targeting significant returns for your portfolio. If you’re looking for guidance in the current market, Paul’s got you covered.
Assistant Managing Editor, Banyan Hill Publishing
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