Slower 1.9% GDP Growth In Q2?
The economy has more likelihood to have a negative surprise. To be clear, economic growth matters because it will affect future earnings reports even if international sales are strong, asserts Don Kaufman, Co-founder of TheoTrade.
Interestingly, as more attention is being paid to central bank policies, the less effect they are having on markets. I am willing to admit that I wrongly thought increasing rates would cause credit markets to be in flux.
As you can see from the chart below, the last two times rates rose, the high yield spread increased. This time, nothing is bothering spreads as they stay at their 2014 lows. As I have mentioned, a possible reason for this is great corporate earnings. However, earnings were great in 2013, yet during the 2013 taper tantrum, there was a bump up in spreads.
It’s arguable that policy is more uncertain now than ever, yet the market is whistling past the graveyard. This entire cycle the market was afraid of quarter point hikes even as QE was being done. Now QE is being revoked and rates are rising without the bat of an eye.
It will be interesting to analyze this time period 10 years from now to see what is actually driving stocks. Surely the economy of 2017 isn’t any better than other points in this recovery. Why does what mattered in 2013 and 2015 not matter now?
Bringing in corporate earnings to the fold of credit conditions makes the outlook look bleaker than what analysts and management teams are projecting.
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