Third Quarter GDP Release
The Commerce Department released their initial estimate of GDP for the Third Quarter this morning, and it exceeded market expectations. Gross Domestic Product grew at an annual rate of 2.9% in the Third Quarter, which was the strongest quarterly gain since 2014 and follows 1.4% growth in Q2. Market economists expected growth to come in around 2.6%, and much of the surprise came from an increase in exports and buildup of inventories during the quarter. Although this report further suggests a low probability of recession in the near term, it was not strong enough to push expected GDP growth rates above 3%. Consequently, the economy continues to grow at a 2% annual pace since the recovery began back in 2009.
There were some encouraging signs in the report, as the economy experienced an uptick in business and government spending during Q3 which were detractors to growth in prior quarters. However, we did see a slight slowdown in overall consumer spending, as personal consumption expenditures rose 2.1% versus an expected increase of 2.6%. Still, spending on long-term durable goods such as appliances and automobiles rose above 9% for the second straight quarter, which was better than expected. Another area that was weaker than expected was spending on home building and improvements, which fell for the second consecutive quarter after being a driver growth for the past several years. However, after hitting a 50-year low over the summer, the nation’s homeownership rate rose to 63.5% in Q3 with over 1.1 million new households forming in the quarter. More importantly, over half of this number were owners rather than renters, an important factor needed for the homeownership rates to rise. Therefore, although we have seen a decline in residential investment in GDP figures over the past two quarters, this may be short term if homeownership rates continue to increase off historic low levels.
A quick update on earnings, this was a busy week for the S&P 500 Index as almost a third of the companies in the index reported earnings this week. As we reported last week, approximately 80% of companies who reported earnings were beating expectations. This trend continued this week as now 290 of the 500 companies in the S&P 500 Index have reported earnings so far for the Third Quarter, with nearly 80% beating their estimates and reporting higher profits. It is looking more likely that it will be enough to break the five consecutive quarters of declining earnings.
The Q3 GDP initial release along with better than expected earnings supports the expectation that the Federal Reserve will raise their benchmark rate this year. However, we still believe this may create some uncertainty as traders assess the potential for a rate hike, which could result in periods of market volatility especially coupled with the upcoming presidential election. Although we view this as a positive scenario for the equity market over the long term, we have maintained higher than normal cash balances in client portfolios given the level of uncertainty. We will continue to monitor the current environment and deploy cash as we see opportunities to invest at more attractive levels.