Second-quarter GDP Shows Slowing Growth; Affirms Investor Sentiment

The advance estimate for second-quarter gross domestic product (GDP) was a real eye opener that showed output increasing at an annual rate of just 1.2% versus a Wall Street consensus of 2.6% — on the heels of a downwardly revised 0.8% increase from 1.1% in the first quarter.

Final sales, which exclude the change in inventories, were up 2.4% during the just-ended second quarter. But do not be shaken by the ugly headline about slowing economic growth.

Even though the second-quarter GDP report was far from what the market and economists were expecting, the Atlanta Fed’s GDPNow model had a forecast of 1.8% growth that was not far off the mark.

The actual report will probably lend added credibility to the notion that the Fed will keep rates lower for longer and refrain from raising rates at its September meeting. The bright spot in the second-quarter report was consumer spending, as expected.

Personal consumption expenditures (PCE) increased 4.2%, which was the strongest gain since the fourth quarter of 2014. That gain accounted for nearly all of the growth in the second quarter, contributing 2.83 percentage points. Net exports contributed 0.23 percentage points.

The biggest drag came from gross private domestic investment, which subtracted 1.68 percentage points. The bulk of that subtraction was the change in private inventories, which subtracted 1.16 percentage points. However, a downturn in both nonresidential and residential investment was part of the mix. In addition, government spending was down 0.9% and subtracted 0.16 percentage points from private domestic investment.

The bond market was quick to react as Treasury prices spiked on the headline as Friday’s close approached and the benchmark 10-year Treasury yield fell to 1.47% from the recent high of 1.62% on July 21. So much for the rate hawks and the notion that the economy was approaching escape velocity.

However, it is a bullish development for equities when market participants surmise that the Fed will have to maintain low interest rates for longer. Fund flows into stocks, especially those with dividend yields in excess of the 10-year T-Note will remain solidly bullish.

The other big catalyst for income investors to act on is to initiate an income-generating system that takes advantage of leading companies that have reported solid second-quarter results and provided positive forward guidance. Roughly half of the companies in the S&P 500 have posted their Q2 numbers and hard not to get excited about the prospects at Lockheed Martin (LMT), Northrop Grumman (NOC), Constellation Brands (STZ), Alphabet/Google (GOOGL), Facebook (FB), Johnson & Johnson (JNJ), NVIDIA (NVDA), Edwards Lifesciences (EW), Amazon.com (AMZN), Costco Wholesale (COST) and UnitedHealth Group (UNH), among many other great companies.

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In case you missed it, I encourage you to read my e-letter column from last week about how the bulls are in command as the economy recovers. I also invite you to comment in the space provided below my commentary.