Stocks Dropped For Second Straight Week Amid Strengthening Economic Reports
Published Friday, August 18, 2017 at: 7:00 AM EDT
Despite political upheaval in Washington, D.C. and a decline in stock prices for the second week in a row, the economy showed strength last week.
The Standard & Poor's 500 stock index, a barometer of America's promise, suffered its second consecutive weekly decline, closing at 2425.55. But the decline for the week was less than 1% and Friday's close was only about 2.5% off the all-time high close of 2480.91, reached on August 7, and it came as economic data continued to suggest the 96-month old expansion and bull market was continuing to gain strength.
Americans opened their wallets in July, boosting retail sales 0.6%. After upward revisions in the two prior months, July's retail sales advance was the largest of 2017.
Retail sales growth excluding gasoline at the end of July was 4.3% higher than in the 12 months earlier. Gasoline is excluded because oil prices declined sharply and, thus, would distort retail sales numbers. That rate of growth in retail sales excluding gasoline compares well with the 3.1% boom rate achieved at the peak of the last expansion in 2007.
The strong report on July's retail sales prompted the Atlanta Fed to bump up its GDPNow real-time estimate from 3.7% for third-quarter GDP growth to an extremely strong 3.8%.
The Atlanta Fed's real-time forecast for 3.8% growth rate in the current quarter, which ends September 30, is good news, but it is only one forecast and the GDPNow forecasts have occasionally been overly optimistic in the past.
While household debt has grown, incidentally, household assets have grown faster. So, rising debt levels are not based on mortgage loans that can't be repaid. Meanwhile, rising household net worth helps drive consumer spending, sparking a "wealth effect" in which people spend more easily when their net worth is growing.
Auto dealerships and non-store retailers, a category dominated by Amazon, experienced the largest increases in sales this year.
Sales at department stores were up by the most in six months, breathing some life into a retail segment in decline for years as internet business skyrocketed and became the behemoth category dominating retail sales since the expansion began in 2009.
Since mid-2008, when Americans faced the most frightening economic slowdown since the 1920s, household debt shrank. In mid-2013, Americans began increasing debt. Household debt has fully recovered to the highs reached before The Great Recession, reflecting the return of confidence in the economy in the context of Americans' increasing willingness to spend, rising income, job growth, and wage gains.
Debt service in relation to household income is near a record low, suggesting that consumers will likely continue to spend at a healthy pace.
The Federal Reserve's financial obligation ratio measures consumers' fixed expenses compared to disposable income. It fully recovered and, at 15.5%, households have 84.5% of their after-tax income available to spend. Since consumers' activity represents about 70% of economic growth, this bodes well for the economy.
The drop in stock prices was not unexpected, as stocks have soared for months in a new leg of a spectacular eight-year long bull market.
Months of turbulence in Washington, D.C. had not spilled over into Wall Street, but last week's event heightened worries over the stability of the Trump Administration and was blamed for the selloff.
The S&P 500 has given back just a quarter of the gains since the peak in stock values and could suffer an emotional decline of 10% or more because of political uncertainty, the nuclear standoff with North Korea, or some totally unexpected event. However, the economy is not falling apart and a recession and bear market are not on the horizon.
While the current expansion is 96 months old - the third-longest post-World War II - the fundamentals driving the economy - consumer spending, income, and corporate earnings - are strong.
This article was written by a professional financial journalist for McCarthy Asset Management, Inc and is not intended as legal or investment advice.