It was a very interesting week on Wall Street that had enough thrills and chills for everyone. The week closed with a thud, though, as the invincible Amazon (AMZN) had a 2.5% decline on Friday, following an earnings report that disappointed. Jeff Bezos was briefly the richest man in the world, but unaudited numbers say he dipped back below Bill Gates somewhere around the $90 billion level, but odds are that Jeff will be just fine. The Friday Amazon slide left the Nasdaq down by about 0.2% for the week, but it was a good week for the mega-techs overall, and it looks as though the early-July selloff in the mega-cap tech has run its course.
What was surprising this week were the strong earnings numbers we saw from the likes of Caterpillar (CAT), McDonald’s (MCD), Boeing (BA) and Coca-Cola (KO). These Dow components were a great sign that the broader economy remains strong, and many bulls breathed a sigh of relief that the broader market was able to hit all-time highs without having to rely on the FANG stocks (some of which have P/E ratios of around 200). Despite the release of strong earnings during the week, the major indices were lackluster, with weekly declines of 1.2% for the Dow, 0.2% for the Nasdaq and 0.1% for the S&P 500.
What kept a lid on Friday’s performance may have been the 2.6% second quarter GDP number. Expectations were edged up to 2.9%, so the 2.6% was a letdown. Oddly enough, the first quarter number was adjusted down to 1.2%, from the previous 1.4%. For some reason, the first quarter number has been coming in weak, and many strategists blame it on the weather. Let’s face it, though, 1.2% leaves a lot to be desired, and the new 2.6% second quarter is nothing to write home about either. Bulls were hoping for a second-quarter number that would fire up the stock market on Friday, but that was not to be the case.
Some economists on Friday commented that the GDP report showed that wage growth remained stagnant in the second quarter and that there was no sign of inflation. The Fed has said that it wants to see some sort of “healthy” inflation, but after eight years of low rates and QE, inflation is simply not there. The Fed’s goal is to raise rates in hopes of making it more attractive for banks to lend, but it is a strange scenario with rates low enough that banks are simply not lending, particularly to smaller businesses. This could explain why GDP remains so low, and it could explain why the Fed remains frustrated.
Then we throw into the mix how the Fed is saying it wants to “shrink” its $4.5 trillion balance sheet, and that adds another curveball to Fed policy. Higher rates and a shrinking balance sheet might help the broader economy, but what happens to a stock market hovering at all-time highs if and when the Fed keeps raising interest rates? Consumers are still in a good mood, as was evident by the University of Michigan Consumer Sentiment report that came in at 93.4 on Friday. It topped estimates of 93.2 and the previous reading of 93.1. So as long as stocks remain near new highs and confidence holds, the Fed will probably put off rate hikes as long as possible.
The conundrum for the Fed is that while all seems well in terms of the stock market, the deeper “real” growth is just not there in the economy. The stock market is higher thanks to a relatively small group of mega-stocks, so the trick for the Fed is to make policy decisions that might strengthen the broader economy. We shall see what the Fed does for the rest of the year, but if the past is protocol, we can probably count on the Fed to not do anything to “rock the apple cart” and possibly hurt the stock market.
On the political front, healthcare repeal or change went down in flames, and it looks as though Washington DC will be extremely divided for the rest of the year. It’s strange that even the individual parties are divided, but the stock market seems unfazed and ready to head higher. This last half of the year should be interesting, so stay tuned! That said, the Gorilla wishes each and all a relaxing final weekend of July. We will be back in action on Monday!
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