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Believe it or not, economic estimates keep improving despite the selloff in equities.
Last week’s retail-sales data and industrial production didn’t seem too impressive at first. But number crunchers have found some bright spots. Bank of America Merrill Lynch concluded that “non-store retail” trends and strong utility output was consistent with a better-than-expected service sector.
Their economic team responded by raising their fourth-quarter gross domestic product estimate by a hefty 0.4 percentage point to 2.9 percent. The Atlanta Federal Reserve, which issues similar up-to-the-minute projections, lifted its “GDPNow” forecast by 0.5 percentage point to 3 percent.
Remember, plenty of areas have remained strong. Hiring and job openings remain near record levels. Last week also saw a sharper-than-expected drop in initial jobless claims (good) and a rebound in rail traffic (good). The Institute for Supply Management’s double indexes for manufacturing and services earlier this month also beat estimates, staying near the top of their longer-term ranges.
Numbers like that stand in sharp contrast to sentiment in the stock market. That’s weird at first, but remember that economic growth and earnings are not the same thing. Margins are coming under pressure as wages rise. (Bad for stocks but good for workers and the economy.) Second, long-term growth stories in technology like Facebook (FB) and Apple (AAPL) were never closely linked to GDP. So now it almost makes sense that they move in different directions.
Trade worries involving China are also a big problem, as most clients know. The big question is whether big-money investors will want to own anything until we pass President Trump’s March 1 tariff-delay deadline. Will buyers remain on strike until then?
In conclusion, stock-market sentiment remains extremely negative and it’s not clear when the bulls will return. But when they do, current data suggests a strong economy will welcome them back.
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