Buckle Up for Volatility?

By Lance Gaitan

Stocks have struggled to make new highs in recent weeks.

What’s going on with the economy?

With the help of the Federal Reserve’s extraordinary policy measures, U.S. gross domestic product (GDP) has expanded slowly over the past nine years.

The U.S. economy grew at a 4.1% rate in the second quarter, the fastest pace since 2014. That wasn’t bad, but the consensus estimate called for a 4.2% expansion.

Spending grew by 4% over the first quarter, while income increased at a 2.6% pace. Prices moved up 1.8%.

The market wasn’t impressed. Stocks fell on the news. Treasuries rallied, and yields declined.

What’s Next?

Here’s the big question that investors must consider: What will fuel future growth?

Corporate earnings are a question mark because of the murky outlook for global trade.

Remember that the surge in second-quarter GDP reflected, in part, a rush to export before tariffs were in place.

Volatility is on the rise in the stock market, but investors appear to be focused on earnings, as opposed to fretting over every trade-related tweet.

Of course, some companies have warned that trade issues could result in weaker earnings down the line.

The Fed’s post-crisis actions have helped to inflate asset prices and foster economic growth.

But the central bank has started to remove these supports, hiking interest rates steadily and shifting from quantitative easing to quantitative tightening.

I believe the main reason that the Fed plans to hike rates further isn’t to get ahead of inflation.

Rather, the central bank aims to have the necessary policy tools available when the economy slows.

The First Domino to Fall?

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Housing is starting to show signs of weakness.

In June, sales of existing homes fell for the second consecutive month, declining 0.6% sequentially and 2.2% year over year.

Although the median sales price increased, inventories also expanded, which is good news for buyers.

I’m not sure how prices went up when sales volumes slipped and inventories increased. But I don’t expect prices continue to rise if sales slow and mortgage rates move higher.

What concerns me about recent weakness in the real estate market is that we’re in the peak sales season!

New-home sales also dropped 5.3% month over month, while the median price dipped 2.5%. On a year-over-year basis, sales of newly built homes ticked up 2.4%. The median sales price, however, slipped 4.2%.

Existing-home sales make up the bulk of real estate transactions, but new-homes sales are more important because of the “ripple” effect from sales of appliances, furniture, and related items.

Monday’s June pending home sales were up slightly on the month but still down 2.5% on the year.

Brace for Volatility

As I’m writing this installment of Economy & Markets, the Fed’s monetary policy arm, the Federal Open Market Committee (FOMC), is meeting.

No policy change is expected when the FOMC issues its statement on Wednesday afternoon, and Fed Chairman Jerome Powell won’t host a press conference.

If the Fed doesn’t surprise the market, the focus will shift to the July employment report, which comes out on Friday.

Wages are expected to increase slightly, while the consensus estimate calls for the economy to add 190,000 non-farm jobs.

If wage growth disappoints, Treasury bond yields could retreat. Lower-than-expected job growth might move stocks lower.

All this adds up to continued volatility in Treasury markets, so be ready for the next trading opportunity!

You can prepare for and profit from surprises in the financial markets with Treasury Profits Accelerator.



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