The Dow Jones Industrial Average saw its daily winning streak snapped at 13 as the index fell by two thirds of one percent on Thursday. Both the S&P 500 and Nasdaq had similar losses on the day despite the first reading of second quarter GDP coming in showing 2.4% growth, which was much higher than expected.
Equities started on a nice up note to begin trading but turned negative by the afternoon. One of triggers attributed to the decline was a yield curve adjustment from the Bank of Japan which caught investors off guard and might mean a tighter monetary policy on the horizon from the BoJ. In addition, stronger second quarter GDP growth pushes out hope for a 'pivot' from the Fed. Although the report did point to inflation continuing to ebb.
A few observations on the GDP Report. It was good to see business still has confidence in the economy despite higher interest rates. Business spending jumped 7.7% on a year-over-year basis, its best showing since the first quarter of 2022, prior to Fed going on its tightening spree. Consumer spending rose 1.6%, contributing to economic growth, but a far cry from the 4.2% increase from the same period a year. The personal savings rate ticked up slightly but is still far below pre-pandemic levels.
Not surprisingly, residential investment fell once again and was a headwind to economic growth. It was the ninth straight quarter of declines from this part of the economy and as long as mortgage rates remain near 7% is likely to remain a drag on the economy. Not surprisingly, government spending played a key role in the solid economic growth in the second quarter.
I would argue that the Federal government spending $150 billion more a month than it is taking in and interest on existing government quickly approaching $1 trillion annually is not sustainable. However, that argument seems to be falling on deaf ears and ignored by the investment community for the time being.
I continue to be very conservatively positioned within my portfolio as I don't think the economy will feel the full force of the 525bps rise in the Fed Funds rate until late this year and into early 2024. Energy is one of few parts of the market I continue to like and I have done quite well with my covered call positions around names like Occidental Petroleum (OXY) , HighPeak Energy (HPK) , Valero Energy (VLO) , Marathon Petroleum (MPC) and Action Alerts PLUS holding Energy Select Sector SPDR Fund ETF (XLE) .
The administration seems determined to undermine the case of the greenback as the global reserve currency and the huge increase in government debt should continue to be headwinds for the dollar. This should benefit commodities. Oil is back up to $80 a barrel on OPEC production cuts and increasing global demand. Stronger growth here combined with heat waves across much of the country should also benefit the case for higher energy prices.
Outside energy, I have few strong convictions right now on what I continue to view as an uncertain market and economy despite yesterday's stronger than expected GDP report.
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