President Bill Clinton famously said, “I did not have …”, hold up, wrong quote. During his initial campaign he stuck to the message of “It’s the economy, stupid.” Where stock prices finish the week will likely be determined by the economy.
The Us Economy
Wall Street will get its first read on the US economy when the second quarter Gross Domestic Product (GDP) numbers are released Friday at 8:30 a.m. Eastern. Economists believe the growth slowed down to 1.9% during the months of April, May, and June compared to the 3.1% for the first three-months of 2019.
While adjustments to net exports are expected to weigh on growth, consumer spending is forecasted to show 3.9% growth in the second quarter, up from a measly 0.9% in the first quarter. Anecdotally, during a recent Sunday trip to one of the more popular suburban malls, parking went into the upper levels of the garage for the first time in a long time.
Consumers are out of the house and opening their wallets as evidenced by strong consumer sentiment. The University of Michigan’s Consumer Survey reading of 98.4 was a little lighter than the consensus of 98.6, but still well into bullish territory.
Sentiment is translating into finding upper level parking spots at local malls. June’s Retail Sales are blowing past economists’ best guesses. The street anticipated modest growth of 0.1% but actual results were a much stronger 0.4%, surprising the street’s brightest minds.
Finally, The Institute For Supply Management surveys for manufacturing and non-manufacturing both show a growing economy. As a rule of thumb, a reading of more than 50 for either report suggests that part of the economy is growing.
The non-manufacturing index came in at a robust 55.1 reading, but slightly lower than the consensus of 55.8 for June. Manufacturing, on the other hand, outperformed Wall Street’s outlook of 51.1, settling at 51.7 for June. Although the reading remains above the critical 50 mark, the index is currently mired in a 10-month decline.
Our Second Quarter GDP Best Guesstimate: Strong consumer trends should lead the way to a GDP reading above forecasted growth of 1.9%. Meanwhile, modest ISM readings will hold growth in check and below the first quarter’s 3.1%. Something in the area of 2-2.1% feels about right.
Market Reaction: Anything stronger than the upper end of the consensus range of 1.6%-2.2% could be bad for stock prices. Traders could react negatively to a hot number if they believe it reduces the chances of the Federal Reserve cutting interest rates, which is widely expected.
On the other hand, a disappointing result below 1.6% might be an example that what is bad for Main Street is good for Wall Street. A bearish surprise would likely cement a rate cut and generate buy signals for Wall Street’s trading algorithms.
Recent price activity for the S&P 500 reveals some weakness after the benchmark index hit all-time highs in early July. Relative Strength is moving downwards but could find some support shortly as it approaches the 50 mark.
With the S&P closing the week near Friday’s bottom and the low for the week, additional selling could be in the cards as trading resumes for the week of July 22, 2019. It would not be surprising to see the S&P 500 trade down to 2950.
Buyers could re-emerge around 2950ish. If not, additional support comes into the picture around 2920. The index’s 50-day moving-average is probably the near-term worst case scenario. That would put the S&P at 2900.
On the flip side, if buyers resume control of Wall Street, all the indexes could challenge their 52-week highs. A breakout to the upside could be at hand if the S&P 500 can get to the better side of 3025. Another 50-100 points could be added to the S&P with a new 52-week closing high.
Investors that are looking to initiate positions in the S&P 500 might consider waiting to see if the benchmark finds its way to 2950. From there, the 50-day moving average of 2900 and climbing, is as low as we’d be willing go. Our upside target would start at 3020ish and move to 3050 if Friday’s GDP number puts investors in the buying mood.