Last week saw strong corporate earnings and continued growth in the U.S. economy. U.S. GDP for the second quarter was 2.6% according to the Bureau of Economic Analysis’ advanced estimate. The strength in the economy was driven by robust business investments for the quarter. Further, the failure of the Republican plan to repeal and/or replace the Affordable Care Act drove headlines last week. It has been my belief healthcare reform failure has been priced into markets for a while, and the most important factor for stock gains is tax reform, which seemed to pick up some momentum over the past few days. I expect Republicans to try and bounce back from the healthcare failure with a concerted push to pass tax reform this year.
The week ahead holds a significant number of corporate earnings, most notably Apple on Tuesday, as well as a full roster of economic releases, with Friday's July jobs report most closely scrutinized. The expectation is 180,000 jobs to be added for the month and the unemployment rate to fall to 4.3%. With the continued tightening of the labor market, I will be closely watching average hourly earnings which have been stubbornly low despite the improvement in employment. The expectation is for a 0.3% increase, and I do expect the actual data to meet or exceed the markets expectation.
On the Federal Reserve (Fed) front, last week the Fed continued to indicate tapering would most likely begin in September. As a result of the Fed, equity valuations, and geopolitical risks, I am growing more concerned about asset prices in the second half of the year. I would be lightening risky assets in August for a better buying opportunity toward year-end.
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