April 26, 5:00 pm EST

The first reading on first quarter U.S. GDP came in this morning at 3.2%— much better than expected.  This is a huge positive surprise, for what many expected to be a terrible quarter.

Just a month ago, the consensus view was something closer to 1%.  Goldman was looking for 0.7% going into the end of the quarter.

With that, we’ve been talking about this set-up for positive surprises all year.

Remember, the economy added on average 173,000 jobs a month in Q1.  Both manufacturing and services PMIs expanded in the quarter, and stocks fully recovered the losses from December.  Add to that, just days into the first quarter, the Fed told us they were done raising rates.  Whatever headwinds the Fed was stirring up, quickly became tailwinds.
Yet we’ve been told an economic recession was coming and an earnings recession upon us.  The above is a recipe for growth, not contraction.

Still, as we’ve discussed, never underestimate the appetite of Wall Street and corporate America to dial down expectations when given the opportunity.  That sets the table for positive surprises.  And positive surprises are fuel for stocks.   Stocks are fuel for confidence.  Confidence is fuel for the economy.

Last week we looked at the early signals on Q1 economic activity.  The positive surprises started with what looks like the bottom in Chinese industrial output and retail sales (two key indicators of economic health). This is important because the global slowdown fears have been centered around the weak Chinese economy.

Then both UK retail sales and the U.S. retail sales came in better.  And yesterday, we had a hot durable goods orders number in the U.S for March.

So, despite the negative picture that has been painted, the trajectory of U.S. economic growth seems to be well intact.

This is just the first reading on the Q1 number, but it gives us an average annualized growth rate of three percent even.  The average annualized growth coming out of the Great Recession (pre-Trumponomics) was just 2.2%.

And keep in mind, the next big pillar of Trumponomics is a trillion-dollar-plus infrastructure spend (with bipartisan support).

Just as expectations have been dialed down, this is where we could see a real economic boom kick in, especially if we get a deal on China (clearing that drag on sentiment).  As we’ve discussed, we are well overdue for an economic boom period.  We’ve yet to have the bounce-back in growth that is typical of a post-recession, if not post-depression environment.  You can see in the table below, the six years that followed the Great Depression, relative to the growth coming out of the Great Recession …


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July 26, 5:00 pm EST

Tomorrow we get the second quarter GDP number. We’ve gone from a consensus view that didn’t believe in the economic momentum, or in the value of fiscal stimulus, to a consensus view that is now looking for more than 4% annualized growth for the second quarter. The switch has flipped in just the past few months.

As a goal for the economy, we hear the 3% growth number thrown around quite a bit. That’s right around long-term trend growth (trend growth is a little higher). But the GDP report that gets the most attention is a quarterly annualized number, which is more of a reflection of what the economy would look like if we moved forward over the next few quarters with similar economic activity. That can be a very volatile number. And we can see big numbers, in good economies and in bad economies. This is where the politicians like to find ambiguity to argue over. The pro-Trumpers will say we’re growing at 3%, something Obama never achieved. And the Obama defenders will point to several 3%+ annualized quarters in the Obama era.

What’s more informative is the average annualized growth over the past four quarters. That’s where you can see smoother trends and considerable improvements in the Trumponomics world.

On that note, we may finally hit that 3% number tomorrow. If the GDP number comes in tomorrow at the Atlanta Fed’s expectations (4.5%), we will have the hottest growth since June 2006.

A 4.5% second quarter number would put the four-quarter average annualized growth at 3.175%–the highest since the pre-financial crisis days. You can also see in the chart, the steady improvement in growth since the election, first driven by the optimism of pro-growth policies, and now driven by policy execution, as deregulation and tax cuts are working through the system.

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April 23, 6:00 pm EST

We’re getting into the heart of Q1 earnings now, with about a quarter of the companies in the S&P 500 now in, and many more reporting this week.  And we’ll get the first look at Q1 GDP this Friday.

Remember, as we went through the price correction in stocks, we’ve been waiting for the data to “prove it” to the market that fiscal stimulus and structural reform are indeed fueling a return to trend growth.

On that note, the performance of companies in Q1 have NOT disappointed.  As of Friday, 80% of the S&P 500 companies that have reported have beat earnings estimates.  And 72% have beat revenue estimates.

Now we have the build up to the big Q1 GDP number at the end of this week.  We were already heading into the first quarter, with the economy growing at better than 3% for the second half of 2017.  And then the fire was fed with the tax bill.

So what are the expectations going into the GDP report?

The Atlanta Fed attempts to mimic the model used by the BEA on their GDP forecast.  They are looking for 2% for Q1 growth. And as you can see in their chart above, the forecasted number has been on a dramatic slide as we’ve seen more and more economic data through the period.  More importantly, Reuters has the consensus view of economists at 2%.

The New York Fed’s model is predicting 2.9% growth (closer to that important trend growth level).

As with earnings, a low bar to hop over tends to be very good for stocks.  And at a 2% consensus, we’re setting up for a positive surprise on GDP.

As we’ve discussed, despite the move higher in global rates over the past week, and the coming break of the 3% barrier in the 10-year yield, it will be hard to dispute the signal of economic strength and robustness from the combination of a huge earnings season and a positive surprise in GDP.  If we get it, that should kick the stock market recovery into another gear.

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September 15, 2017, 4:00 pm EST              Invest Alongside Billionaires For $297/Qtr

BR caricatureWe’ve past yet another hurdle of concern for markets this past week.  Last Friday this time, we had a potential catastrophic category 5 hurricane projected to decimate Florida. 

Though there was plenty of destruction in Irma’s path, the weakening of the storm through the weekend ended in a positive surprise relative what could have been.

So we end with stocks on highs.  And remember, we’ve talked over past month about the quiet move in copper (and other base metals) as a signal that the global economy (and especially China) might be stronger than people think.  Reuters has a piece today where they overlay a chart of economist Ed Yardeni’s “boom-bust barometer” over the S&P 500.  It looks like the same chart.

What does that mean? The boom-bust barometer measures the strength of industrial commodities relative to jobless claims.  Higher commodities prices and lower unemployment claims equals a rising index as you might suspect (i.e. suggesting economic boom conditions, not bust).  And that represents the solid fundamental back drop that is supporting stocks.

With that in mind, consider this:  In the recent earnings quarter, earnings and revenue growth came in as good as we’ve seen in a long time for S&P 500 companies. We have 4.4% unemployment. The rise in equities and real estate have driven household net worth to $94 trillion – new record highs and well passed the pre-crisis peaks (chart below).

sept15 household net worth

Now, people love to worry about debt levels.  It’s always an eye-catching headline.

But what happens to be the key long-term driver of economic growth over time?  Credit creation (debt).  The good news: The appetite for borrowing is back.  And you can see how closely GDP (the purple line, economic output) tracks credit growth.

sept 15 gdp v credit

Meanwhile, and importantly, consumers have never been so credit worthy.  FICO scores in the U.S. have reached all-time highs.  So despite what the media and some of Wall Street are telling us, things look pretty darn good.  Low interests have produced recovery, without a ramp up in inflation.

But as I’ve said, it has proven to have its limits.  We need fiscal stimulus to get us over the hump – on track for a sustainable recovery.  And we now have, over the past two weeks, improving prospects that we will see fiscal stimulus materialize — i.e. policy execution in Washington.

To sum up:  People continue to look for what could bust the economy from here, and are missing out on what looks like the early stages of a boom.


January 10, 2017, 6:00pm EST

This morning we got a report that small business optimism hit the highest level since 2004, on the biggest jump since 1980. This follows a big jump in December, which obviously follows the November elections.

Small business owners that have survived the storm over the past nine years, most likely have had credit lines pulled, demand for their products and services crushed, and have slashed their workforce. If they were able to piece it together to continue on, they’ve operated as lean as possible, and they’ve slowly seen it all recover. And finally, over the past couple of years, they’ve likely had banks calling offering them money again. But, given the scars of the financial crisis, taking on debt again (or more debt) in an uncertain world, many have turned it down.

But if you’re going to dip a toe in the water again, take on some risk to grow your business (to expand, to hire, to build inventories), small business owners are saying now is the time. They are buying into what the Trump agenda is promising–a “dynamic booming economy.”

You can see that reflected in this chart…

The survey shows that 50% of small business owners expect the economy to improve. That’s the most in 15 years. With that, they think it’s a good time to expand. And they expect higher sales coming down the pike, so they’ve been building inventories.

As we know, in the recovery that was manufactured by the Fed (and other central banks), Main Street didn’t participate–trillions of dollars spent and little impact on the real economy. But this survey shows that the Trump effect is already doing what nine years, and trillions of dollars of monetary stimulus and intervention, couldn’t do. Most of the small business sentiment data has now returned to pre-crisis levels, just on the pent up demand that has been unleashed by the prospects of a return to prosperity.

This number tends to correlate highly with consumer confidence numbers. Consumer confidence numbers drive consumption. And consumption contributes about two-thirds of GDP. By restoring confidence, the Trump effect on growth can be self-fulfilling.

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