Stocks at Record Levels Despite Fears of a Recession
On June 2, 2017, the Dow Jones Industrial Average (Dow) reached a record high closing level of 21,206.29. It was also the first intraday record (21,225.04) since March 1, 2017. On top of that, it was the second consecutive day in which the Dow notched up a record high close.
Meanwhile, the S&P 500 and Nasdaq also hit record intraday and closing records. The Russell 2000, which tracks small cap stocks, is around one percent from a record high.
The stock market, as measured by the Dow, is used as an economic barometer for how well the U.S. economy is performing. Judging by the broad-based record highs being hit, the U.S. economy must be on fire. After all, the Dow has set 34 new record-closing highs since Donald Trump won the U.S. election in November. But this simply isn’t the case.
Investors were confident that Trump’s business-friendly platform, including tax cuts, infrastructure spending, and other job-boosting measures, would help fuel U.S. gross domestic product (GDP) growth to a sustainable range of three to four percent.
Recall if you will, the U.S. economic recovery that started under President Obama has been the slowest recovery since World War II. Furthermore, during Obama’s eight years in office, he helmed average annual GDP growth of just two percent. In the 10 previous economic expansions, U.S. GDP growth averaged 4.3%. President Obama is the only President to never record one year of 3% GDP growth.
That economic expansion continues at a glacial pace under President Trump. In the first quarter of 2017, U.S. GDP growth was 0.7%; the weakest pace in three years. The most recent U.S. economic data to roll in continues to show the U.S. economy is struggling and could stall.1
The U.S. Labor Department said that just 138,000 jobs were created in May; far below the 185,000 expected. It was also much lower than the 12-month average of 181,000. Wages also advanced less than expected, with average hourly earnings up 2.5% on an annual basis.2
Where the Federal Reserve has been raising its key lending rate to keep so-called U.S. growth in check, it may now have to stop raising its interest rates after its expected next hike in mid-June because of weak growth and inflation.
Despite warnings that the U.S. economy is faltering, that interest rate hikes will be suspended, and concerns that scandals plaguing Trump will prevent him from getting his pro-growth platform through Congress, stocks are at record levels, driven largely by tech stocks. This is in sharp contrast with the bond market, where interest rates have been sinking due to fears that there is simply not enough fuel to juice the U.S. economy.
Stocks also continue to surge despite growing geopolitical tensions from recent terrorist attacks in London, Paris, Stockholm, and Berlin. Investors also don’t seem too concerned about simmering tensions between the U.S and North Korea, Syria, Iran, and Russia.
Stocks may be at record levels, and as overvalued as they were in 1929, but the bull-market could be derailed and experience a serious correction or even stock market crash in the coming months because of this investor complacency.
Investors do not seem too concerned about a recession or fear any geopolitical tensions, but that just means stocks have further to fall if the U.S. economy continues to churn out disappointing data or should the U.S. military be engaged in serious conflict.
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- “National Income and Product Accounts Gross Domestic Product: First Quarter 2017 (Advance Estimate),” Bureau of Economic analysis web site, April 28; https://www.bea.gov/newsreleases/national/gdp/2017/gdp1q17_adv.htm.
- “Employment Situation Summary,” Bureau of Labor Statistics web site, June 2; https://www.bls.gov/news.release/empsit.nr0.htm.
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