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It’s a 3% Economy with Earnings Growth to back it up!

Monday, April 30, 2018   (0 Comments)
Posted by: Peter Johnston
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Although I recognize many are more focused on the upcoming NFL draft later this week, keep an eye on the 10-Year Treasury (It surpassed 3.0 percent briefly on Tuesday April 24th), and corporate earnings. The Q1 earnings are backing up the Bullish economic data. We have finally returned to all aspects of a 3% Economy.  The U.S. economy has averaged more than 3.0 percent GDP growth Q2-Q4 2017 (Q2 ’17 +3.1%; Q2 ’17 +3.2%; and Q3 +2.9%).  Later this week we get the government’s first guess at Q1 2018 GDP. My outlook is for the best Q1 GDP in more than a decade surpassing +1.5 percent.  Recall that Q1 is the period in which GDP is weakest being post-holiday selling season, onset of winter, and recessed housing activity, etc. For comparison purposes, Q1 2017 registered +1.2 percent. And what comes with the return of an economy with GDP expanding at an annualized rate of 3.0 percent? It typically brings higher interest rates and market volatility. This column has been elevating the risk of higher interest rates and a 3.0 percent 10-Year Treasury rate since the beginning of 2018 - and we experienced it briefly on Tuesday, April 24th before it settled back to 2.99 percent at market close that day. Volatility typically makes a reappearance from stage right in a rising rate environment as the market adjusts. Ever since Groundhog Day on February 2nd, we have had market volatility. However, the market is responding to higher rates with stellar corporate earnings - and that is the prescribed medicine to reduce higher interest rate fever. As the Federal Reserve steps out of the market to allow price discovery on assets it has artificially supported via purchases to its balance sheet through the Financial Crisis, the market is sorting out things out and determining what industries, companies, and assets warrant a higher yield representative of their relative risk. In other words, the market is being allowed to work and determine the risk allocation. While that process may not be pretty, it is characteristic of a healthy market and return of a 3% economy.

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