Stocks Rally As Economic Data Signals 3.7% GDP Growth

Another Rally On Wednesday

It was another record day for small caps and tech stocks as the Russell 2000 was up 0.68% and the Nasdaq was up 0.67% on Wednesday. The S&P 500 was up 0.86% to 2,772. The next big technical milestone is 2,787 which is the 2nd highest peak in history. It was the first failed attempt at a new record high after the January peak. I’m still bullish on stocks, but obviously less so the more the market goes up.

The CNN Fear and Greed Index is now at 65 out of 100 which signals greed. If the market goes straight to the all-time high, it will be extremely overbought like the Nasdaq and Russell 2000 already are now. The two down sectors I’ve highlighted in the past which could help the S&P 500 if they were revived were the financials and consumer staples. The consumer staples underperformed on Wednesday as they were only up 0.14%. However, the financials did well as they were the 2nd best performing sector on the day, rallying 1.84%.

Fed Will Hike Next Week

The yield curve hasn’t flattened much in the past couple of days as the trend where stocks rally and the curve flattens has ended. The latest difference between the 10 year and 2 year yield is 45 basis points. Next week is the Fed’s meeting. The 25 basis point rate hike is completely priced in as there’s a 93.8% chance the Fed raises rates.

The Italian crisis temporarily put the possibility of 2 rate hikes this year on the table. That option has now been taken away as the two strong possibilities are either 3 or 4 hikes. If the curve stays where it is, the Fed will be lucky. I’m working under the assumption that the Fed stops its hikes when the curve inverts. The Fed is concerned about an inversion, but clearly not enough to slow down hikes.

Peak Growth?

Even though stocks rallied on Wednesday, the main discussion on Wall Street was driven by a Goldman Sachs call for GDP growth to peak this quarter. The Goldman Sachs GDP tracker is showing 3.7% growth in Q2. That’s the same as the CNBC GDP tracker which averages 10 forecasts. Given the structural slowing in all advanced economies, I think if GDP growth does come in at 3.7%, it will be tough to accelerate higher. However, I don’t necessarily think slightly lower growth throughout 2018 means stocks will necessarily fall. There could be a modest rebound in Europe, especially since the Italian political crisis has calmed down. Better weather could help Europe since each basis point of growth is highlighted so much because nominal growth is so low.

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