Just yesterday, I was reading about how the US economy would fall backwards in the second quarter. The several articles I read all sounded so learned and, well, “like, for sure.”
- U.S. economic growth, as measured by gross domestic product, unexpectedly accelerated in the second quarter by 1.7 percent at an annual rate, the government said. Economists had expected a 1.0 percent gain.
Oh my! How could “economists” miss so badly? I know, I know, government stats are not to be trusted, yet, when I hear that, I ask myself, “What then is an independent metric for measuring economic activity?”
- In addition, private employers added 200,000 jobs in July, according to the ADP National Employment Report, topping economists’ expectations and laying a firmer foundation for the rest of the year that could bring the Fed closer to cutting back its stimulus.
The above is one for sure, although I have read that the ADP, NEP is not to be trusted either. Oh well, my thinking is none of it matters anyway, because when all is said and done, the only metric worth anything is corporate earnings. Tracking which corporations are making money and how much money they are making defines stock market movement in general.
Tracking the money flow is another metric that measures economic activity generally, but it measures market sentiment, as well.
- U.S. government bond yields have risen at a faster-than-expected pace in the recent months on expectations that the Fed will begin scaling back its monthly bond buying program later this year.
The above suggests money is moving out of bonds, but it does not tell us where it is going. One might assume it has found its way into equities, but, if one listens to the chatter, that flow has yet to occur in full force.
- The Federal Reserve will lose control of interest rates as the “great rotation” out of bonds into equities takes off in full force, according to one market watcher, who sees U.S. 10-year Treasury yields hitting 5-6 percent in the next 18-24 months.
That “one market watcher” is Mike Crofton, President and CEO of Philadelphia Trust Company and, as you can imagine, he has an opinion to offer about the flow of money out of bonds.
- “If the great rotation that everybody talks about out of bonds into stocks does happen, and that gains its own momentum, you will see rates begin to back up very quickly; the Fed will not be able to control it,” Crofton added, who argues that for now, “the great rotation” has been more out of bonds into cash, rather than stocks.
Into cash, really? The market is sitting at all-time highs, so at least some of the money flowing out of bonds must have found its way into equities, yes? If not, how are all those smart money folks sitting on their cash making their money work? There not, and if that is the case, say Crofton is correct, then, when will that money makes its way into the market? My guess is it is moving in bit by bit over time, has been for a while, and will continue to do so as the US economic momentum continues.
So, in the end, the GDP growth is important, no matter who measures it, but the number the government gives is irrelevant. The ultimate metric for economic growth is consumer confidence, as measured by corporate earnings, and the ultimate metric for measuring market sentiment is the market itself – where is the money going?
This is only Wednesday, and there is still news and data to come this week. So, be prepared for some possible minor volatility, but when it is over, go back to the basics. Keep your eye on corporate earnings and bond yields. Both have something worthwhile to tell us.
Trade in the day; Invest in your life …
