Stocks had their best week since June as trade tensions with China showed some signs of easing.

However, we still believe both sides are entrenched in their positions and that a final deal will be difficult to achieve – new tariffs on both countries’ goods came into effect over the weekend. Despite these trade tensions and concerns over the yield curve inversion (short-term interest rates higher than long-term rates), we remain constructive on the U.S. economy. The consumer is very healthy which should support further economic growth (consumer spending makes up the majority of economic activity), and ultimately stock prices.

Dow Jones3.115.14.1
S&P 5002.818.32.9
MSCI EAFE0.910.2-3.3
MSCI Emerging Markets1.24.2-4.2
10-year U.S. Treasury1.502.722.41
30-year U.S. Treasury1.963.022.74

Source: Janney ISG, Bloomberg. Data as of 8/30/19.

Consumer Spending and Healthy Labor Market Support Economic Growth

While last week’s consumer sentiment readings were mixed, solid consumer spending continues to support economic growth. We pay close attention to labor market and sentiment readings, both consumer and business, for potential signs of deteriorating consumer activity. The incoming data keeps us encouraged that a healthy consumer can continue supporting economic growth.

While second quarter (Q2) economic growth was revised down to a 2.0% annualized rate last week, consumer spending was revised up to a 4.7% annualized rate, the most since Q4 2014. Consumer spending continues to be underpinned by a strong labor market. While initial jobless claims edged up 4,000 last week to 215,000, matching the consensus, the less volatile four-week average edged down to 214,500 claims. The level and trend of jobless claims remain close to their lowest readings since 1969, reflecting tight labor market conditions and consistent with further economic growth.

Last week’s consumer sentiment readings were mixed. The Conference Board’s Consumer Confidence Index came in well above consensus expectations and still close to its best level since late-2000. However, the Michigan Consumer Sentiment Index fell to its lowest level since October 2016. In total, these readings remain consistent with further positive consumer spending.

The Commerce Department Q2 economic report also included positive news on corporate profits. Q2 Corporate profits from current production rebounded 5.3% in Q2, the most in five years, led by an 11.7% jump in profits from foreign sources. On a y/y basis, corporate profits increased 2.7%, reversing a decline in the previous quarter and reducing the risk of a technical earnings recession. Higher corporate profits are needed to support business confidence, capital expenditures, and job creation – in addition to supporting higher stock prices.

July Consumer Spending Also Suggests Further Economic Growth

Personal consumption expenditures (PCE) jumped 0.6% in July, about double the gain in the previous month, and above the consensus estimate of 0.5%. This is another data point that shows strong consumer spending is underpinning the ongoing expansion, despite emerging weakness in other segments of the economy (e.g., manufacturing activity).

All of these data points suggest that a strong labor market and a healthy consumer will support consumer spending growth this year, curtailing the risk of recession.

Friday’s PCE report also showed muted inflationary pressures with the July PCE Price Index up 1.4% year/year, while the core price index rose 1.6%. Both are well below the Fed’s inflation target of 2.0%, as inflation pressures remain subdued. This is important because it gives the Fed flexibility to lower interest rates in the face of tariff uncertainty and slower global economic growth.

This report is provided for informational purposes only and shall in no event be construed as an offer to sell or a solicitation of an offer to buy any securities. The information described herein is taken from sources which we believe to be reliable, but the accuracy and completeness of such information is not guaranteed by us. The opinions expressed herein may be given only such weight as opinions warrant. This Firm, its officers, directors, employees, or members of their families may have positions in the securities mentioned and may make purchases or sales of such securities from time to time in the open market or otherwise and may sell to or buy from customers such securities on a principal basis. Past performance is not necessarily a guide to future performance.

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