Stock Market Commentary from the Desk of Kern Campbell at Financial Analysts
- PART I: THE US ECONOMY
- PART II: WHAT’S WORKING AND WHAT’S NOT
- PART III: THOUGHTS ON THE STOCK MARKET
THE US ECONOMY
The economic picture here in the US looks good. To summarize, here is a note from Brian Wesbury, Chief Economist at First Trust:
Paul Krugman, Larry Summers and Bob Gordon have some ‘splainin to do. Where’s that “secular stagnation?”
Since 2009, they, along with many others, have said the US economy is stuck at 2% real growth. Their theory got traction after 2009, as the U.S. saw what we called a Plow Horse Economy.
But, we never believed slow growth was permanent. The real problem was the size of government – too much spending, too much regulation and excessively high tax rates were holding the economy back. We believed the idea of “secular stagnation” was another Keynesian red herring, designed to hide the damage government was doing and fool people into accepting slow growth as something that couldn’t be fixed.
But after cutting tax rates and regulation, Friday’s GDP report demolished their theory. Real GDP grew at a 4.1% annual rate in the second quarter, and is up 2.8% in the past year. And although some analysts pointed out that net exports were an unusually large boost in Q2, they ignored that inventories were an unusually large drag (the largest drop since late 2009). As a result, our initial forecast for real GDP growth in Q3 is 4.5%, even faster than was just reported for Q2.
You can read Brian Westbury’s full report here:
https://www.ftportfolios.com/Commentary/EconomicResearch/2018/7/30/the-economic-surge
WHAT’S WORKING AND WHAT’S NOT
Technology, Financials, Energy and Healthcare have led the US Stock market so far in 2018.
Based on history, this is a good sign. Technology and Financials specifically are known as “offensive” sectors of the market and signal the market is in a growth phase.
It’s also important to note two of the poor performers, telecom and utilities, are historically seen as “defensive” sectors. This data continues to support the bullish thesis for the US stock market.
THOUGHTS ON THE STOCK MARKET
“Consumer confidence rises above expectations in July” – Gillian Brassil, CNBC 7.30.2018
“Trump tariffs threaten the strong economic growth and expected market returns: CNBC Fed Survey” – Steve Liesman, CNBC 7.30.2018
“US home prices march higher in May, throttling sales” – The Associated Press, 7.30.2018
I’m betting at least one of those headlines triggered an emotional response from you (either good or bad), right?
That’s what a good writer needs to do in order to get your attention. They need to cause an emotional response to gain your attention.
With this said, you shouldn’t invest with emotion. For all investors it is important to keep emotions in check when making financial decisions. This will always be a reality for investors regardless of what daily news headlines might say.
In order to filter our noise and help keep from letting our emotions take over we must find tools to keep us focused on what is important.
One of the factors that I believe is critical to understanding the health of the stock market is what I call “Market Participation”.
In simple terms, market participation is the number of stocks going up in price vs. the number of stocks going down in price. A healthy stock market will have more winners than losers. When the losers take control it is time to closely monitor your holdings.
One of the most popular ways to measure market participation is through the use of the New York Stock Exchange (NYSE) Advance-Decline Index. This measures the number of stocks on the exchange going higher versus lower. I apply my own filters to smooth out the data and provide signals for evaluating the state of the market.
In this chart, you can see how market participation rates provided warning signs back in 2008 and again in 2015. While the slowdown in 2015 did not turn to recession, it certainly was a weak period in the stock market.
Today, the advancing stocks are leading the market higher. As a result, this indicator continues to support the current bull market.
Currently, this indicator and many others that we use lead us to believe it is best for investors to worry less and enjoy the market’s recent march higher.
As we always say, when the market facts change, so shall we!
For now, the facts are firmly in the bullish camp.
If you would like to discuss your investments or other financial topics, we can be reached at 800-722-5862. We look forward to speaking with you soon.
Sincerely,
Kern
