by Connor Darrell, Head of Investments
Markets (and politicians) were given reason to cheer on Friday as the first (of three) Q2 GDP estimate(s) showed a 4.1% annualized rate of economic growth, closely in line with expectations. U.S. equities (as measured by the S&P 500) moved slightly higher on the week but underperformed their international counterparts which benefitted from an apparent easing of trade tensions between the U.S. and the European Union. Bond yields inched higher, and the 10-year treasury is now close to re-testing the psychologically important 3% mark.

More than 50% of S&P 500 companies have now reported Q2 earnings, and while there have been some high-profile disappointments (Facebook, Exxon Mobil), Factset is reporting a blended earnings growth rate of 21.3%. We expect strong earnings growth to continue for the rest of 2018, as the benefit of tax reform continues to inflate year over year comparisons.

Breaking Down GDP
Four percent GDP growth is an excellent headline number and is the highest year over year growth rate in U.S. GDP since 2014. Under the hood, the key drivers of increased growth in Q2 were American consumers, who bounced back strongly following a disappointing first quarter that was likely impacted by bad weather. All data seems to suggest that consumption (the largest component of GDP measurement) is quite healthy. And while not a component of GDP, M&A activity in 2018 is at an all-time high as businesses are digging into their deeper pockets to make strategic acquisitions. That businesses (who typically take a long-term, forward-looking view when making decisions) are willing to take risks in executing mergers and acquisitions is a positive sign for the U.S. economy.

Looking forward however, there are reasons to expect GDP growth to return to more modest levels. Late in the economic cycle and with unemployment already at very low levels, it is unlikely that consumer spending will be able to continue leading growth forward for a lot longer. Additionally, rising housing prices and higher mortgage rates are likely to begin eating into housing demand. All told, the U.S. economy is one of the healthiest in the developed world, but it is unlikely that we have ushered in a new era of explosive economic growth.

by Connor Darrell, Head of Investments
U.S. equity markets finished roughly flat last week as Q2 earnings season kicked into full gear. Small cap stocks continued their recent leadership amid ongoing uncertainty over global trade. Small cap stocks tend to be more domestically focused than their large cap peers, and this has helped insulate them from some of the pressure felt by companies that rely on global commerce as a key revenue driver. International markets managed to creep higher in the aggregate but produced mixed results by region. European stocks have been troubled recently by some signs of slowing economic growth and uncertainty surrounding the ongoing Brexit negotiations.

In the bond market, interest rates ticked higher and the recent trend of curve flattening was bucked for the time being. The 10-year treasury now sits at about 2.89%, still well below the peak of 3.11% that it reached back in May. In an interview with CNBC last week, President Trump commented that he was “not happy about interest rates going up,” but it remains unlikely that the Federal Reserve (which operates independently of government) would adjust its policies based upon the president’s comments.  Part of the president’s concerns stem from the resulting rise in the U.S. dollar, which makes it relatively more expensive for foreign investors to allocate capital to U.S. based projects/companies.

Trump and the Fed
President Trump’s comments regarding the Fed’s interest rate policies caught the attention of some segments of the market but were not significant enough to cause any major disruption. In fact, it is unlikely that anything the president says about Fed policy will be material enough to meaningfully move markets because the Federal Reserve was created as an independent body, designed to function free of political interference.

This was not the first time President Trump has commented on the efficacy of the Fed’s policies, and it likely will not be the last, but we anticipate the Fed to continue its interest rate increases for as long as the economic data suggests that it is prudent.