The GDP Outlook from the Business Sector

The economic expansion will continue but growth will slow over the next 12 months, if you put stock in the latest Business Conditions Survey just out from the National Association for Business Economics. Less than half of respondents to the survey expect GDP growth to rise by more than 2 percent over the next four quarters — down from 53 percent who said so in April, and 67 percent who said so in January.

U.S. GDP rose 2.1 percent in the second quarter, according to data released by the Commerce Department last week, That was down from 3.1 percent in the first quarter and comes on the heels of 2.5 percent growth for all of 2018.

The Business Conditions Survey also suggested that the job market may be cooling slightly. One third of respondents said that they had hired during the second quarter, down from 44 percent who had said so a year earlier. And just under one third said they expected to hire in the next three months, down from 41 percent a year ago.

Those Incredible Buybacks

Companies in the S&P 500 index are returning cash to their shareholders at a historic rates, according to a new report from Goldman Sachs. In the 12 months ended March 31, firms in the S&P 500 index  spent 103.8 percent of their free cash flow on stock buybacks and dividends, up from 101.9 percent in the fourth quarter of last year.

This is the first time that the S&P companies have spent more cash than they earned on payouts since the period between September 2006 and March of 2008. At that time, there was a seven-quarter stretch during which S&P 500 companies paid out more to shareholders than they earned in cash.

Not surprisingly, these corporations now have a lot less cash on hand. Overall, during the past year, nonfinancial companies in the S&P 500 have seen their cash levels decline by $272 billion, a 15 percent decline that represents the largest drop since at least 1980.

Winner Take All?

Is the stock market “winner take all”? Just 1.3 percent of the world’s public companies account for all the market gains during the past three decades, according to a new study from a professor at Arizona State’s Business School. Outside the U.S., the gains are even more concentrated, with less than 1 percent of all equities driving all of the net appreciation in share prices.

From 1990 to 2018, just five companies - Apple, Microsoft, Amazon.Com, Alphabet Inc. (Google) and Exxon Mobil - accounted for 8.3 percent of global net wealth creation. But those five companies account for just 0.008 percent of the total sample set of 62,000 publicly traded companies.

During that 1990-2018 period, the best-performing 811 companies accounted for the entire net stock market appreciation of $44.7 trillion (in excess of the returns you could get from Treasury bills).  Meanwhile, a majority of stocks - 37,195, or 60.9 percent - were net money losers, subtracting a $21.83 trillion from the total.

Second Quarter GDP Report

Growth decelerated in the second quarter as tariffs and a global slowdown weighed on the U.S. economy, the Commerce Department reported this morning. GDP increased by 2.1 percent in the quarter, down from 3.1 percent in the first quarter.

The biggest factors driving growth last quarter: Personal consumption expenditures rose 4.3 percent, the strongest performance since the fourth quarter of 2017. Government consumption expenditures and gross investment rose 5 percent, the fastest pace since the second quarter of 2009. At the same time, gross private domestic investment tumbled 5.5 percent, the worst since the fourth quarter of 2015.

This morning's report also featured revisions for the past five years. Updated government figures show that GDP expanded 2.5 percent on a fourth-quarter-over-fourth-quarter basis last year, down from the previous estimate of 3 percent .

Tesla's Crash

One of the biggest casualties of this week's earnings report: The electric-car maker Tesla. The Wall Street consenus had the ecletric-car maker losing 40 cents per share this quarter. Instead, it lost nearly three times as much, $1.12 per share.

That's a big miss, resulting in the stock losing 10 percent of its value in a single day. But on the other hand, Tesla had lost $3.06 per share during the same period last year. So the company is at least losing less money now.

But there was also some good news from Tesla. It reaffirmed its guidance for full-year delivery, saying it still expects to sell 360,000 to 400,000 vehicles this year, mostly Model 3s.

Rumblings in the Housing Market

Sales of previously owned homes slipped 1.7 percent in June, reflecting ongoing weakness in the U.S. housing market despite a sharp drop in mortgage rates. Existing-home sales sold at a 5.27 million annual pace last month, down from 5.36 million in May, the National Association of Realtors said yesterday.

A 30-year fixed-rate mortgage averaged 3.8 percent in June vs. almost 5 percent last November. But even after that big drop in mortgage rates, sales of previously owned homes are 2.2 percent lower than a year ago.

On the other hand, the median selling price in June rose 4.3 percent to $285,700 from a year earlier. That means that home prices have now risen in every month for more than seven years.

The Problems of Newlyweds

Is someone you know planning to get married? Here’s a little cautionary warning you can give them: Most engaged couples and newlyweds don’t talk about money on a regular basis, according to the findings of a new survey by Northwestern Mutual and wedding planning and registry specialist The Knot.

Only 37 percent of newlyweds and engaged couples talk about their finances monthly. While being on the same page financially is critical to a happy, long-lasting marriage, 72 percent of those surveyed do not have a clear plan when it comes to saving for their passions.

The ironic thing is that 82 percent of couples feel closer to their partners when they’re in agreement about money. But at the same time, 40 percent feel anxious when they think about financial planning as a couple - and 20 percent admit to hiding purchases and cash from their partners.

The Big Week Ahead

If you're a stock investor, this is a week for you to keep your eyes and ears open. One-third of the 30 components of the Dow Jones Industrial Average and 144 companies on the S&P 500 index are due to report their earnings, making for one of the busiest earning stretches this season.

The parade of reports could provide some good news for a market that has mostly skidded lower over the past several sessions. Both benchmarks, as well as the tech-heavy Nasdaq, finished Friday with their steepest weekly declines since the end of May.

The big names from the Dow that are set to report include Coca-Cola, Caterpillar, McDonald’s and Visa. But maybe the most intriguing is a non-Dow company, Facebook, which will report earnings on Wednesday. Facebook is expected to announce a $2 billion hit to earnings in order to settle a fine from the FTC over data privacy. 

New Jersey's New Claim to Fame

Which state saw the biggest drop in its unemployment rate last month? Why, it’s our own New Jersey. Unemployment here in the Garden State dropped from an already low  3.8 percent in May to 3.5 percent in June, according to new figures out from the Bureau of Labor Statistics.

That 0.3 percentage point drop edged out Colorado and Alabama, which both fell by 0.2 percentage points, to lead the nation last month. The overall nationwide unemployment figure is 3.7 percent, but state unemployment figures range from a low of 2.1 percent in Vermont to a high of 6.4 percent in Alaska.

New Jersey’s 3.5 percent unemployment rate marks the lowest in our state’s history for as long as these figures have been kept, which dates back to 1976. According to the BLS, we have added 47,600 jobs over the past 12 months.

The Latest From the Beige Book

The U.S. economy continued growing at a “modest” rate in recent weeks, with consumers continuing to spend and a “generally positive” outlook overall despite disruptions caused by U.S. trade policy. That's according to the latest Beige Book, published by the Federal Reserve yesterday.

Employment continued to expand and “labor markets remained tight, with contacts across the country experiencing difficulties filling open positions,” the Fed reported. “The outlook generally was positive for the coming months, with expectations of continued modest growth, despite widespread concerns about the possible negative impact of trade-related uncertainty.”

In our area, ports along the East Coast saw robust activity, with one reporting record-breaking imports led by furniture. On the other hand, prices for Broadway theater admissions were down roughly 10 percent from a year earlier.

Fund Fees Are Falling

Investing in equity and hybrid mutual funds through 401(k) plans became cheaper in 2018 according to a new report from the Investment Company Institute, a trade group for the fund industry. This is part of a longer-term trend; the fees investors have been paying have dropped significantly since 2000.

At the end of last year, mutual funds represented 63 percent of the $5.2 trillion in 401(k) plan assets. Plan participants incurred an average expense ratio of 0.41 percent for equity mutual funds in 2018, which is down from 0.45 percent in 2017 and  down from 0.77 percent in 2000 — a 47 percent decline.

The average expense ratio that 401(k) plan participants incurred for investing in hybrid mutual funds fell to 0.49 percent in 2018, down from 0.51 percent in 2017 and 0.72 percent in 2000. Bond mutual fund investors, on the other hand, saw their average expense ratio hold steady at 0.34 percent between 2017 and 2018, although they're down from 0.6 percent in 2000.

The Chinese Slowdown

While the American economy continues to be strong, China's economic growth has slumped to its lowest level in nearly three decades. The country's GDP grew at 6.2 percent in the quarter ended June, according to government figures released on Monday. That's the slowest quarterly growth since 1992 and down from 6.4 percent in the previous quarter.

China's exports fell 1.3 percent year-on-year for the first half in dollar terms, while imports dropped 7.3 percent. The country recorded a sharper decline in exports to the United States, which decreased 8.1 percent for the first six months of 2019. Imports from the United States plunged 30 percent year on year.

This is already affecting American companies that do business in China. To take one significant example, Apple's revenue in the Greater China region, which includes Hong Kong and Taiwan and accounts for 18 percent of its overall revenue, dropped 21.5 percent in the second quarter from the same period a year ago.

What American Kids Need

Are you giving more money to your adult children than you are to your retirement plan? For many Americans, this is the tradeoff they're facing. According to a report by Merrill Lynch and Age Wave, U.S. parents spend $500 billion a year on their 18- to 34-year-old adult children – twice the amount they contribute to their retirement savings.

Seventy percent of adults between the ages of 18 and 34 received some sort of parental financial support in the last year, with over half of those between the ages of 30 and 34, the report states. More than half of all millennials acknowledge that they could not afford their current lifestyle without the financial support of their parents.

What are parents paying for? The report shows that they aren’t just helping their grown children with emergencies. Some 60 percent are covering food and groceries, 54 percent are covering cell phones, and 47 percent are helping with car expenses.

A Record Day for the S&P

The S&P 500 Index  hit an all-time intraday high on Wednesday, rising above 3,000 for the first time, before closing at 2,993, its second-highest close. More remarkably, of the S&P’s 500 components, a whopping 54 stocks hit intraday highs as well.

Among the more notable names setting new highs:

• PayPal, which is up 42 percent year-to-date
• Lockheed Martin, up 41 percent
• Microsoft, up 36 percent
• Starbucks, up 37 percent
• American Express, up 33 percent
• Costco, up 33 percent
• Oracle, up 33 percent
• Waste Management, up 32 percent
• Walt Disney, up 31 percent
• Dollar General, up 30 percent

The Biggest Earnings Movers

As we close in on earnings season, Bespoke Investments has put together a list of the stocks that tend to move the most when they report their earnings. In first place is TravelZoo, an Internet travel site that has seen its share price move an average of 13 percent, up or down, every time it reports.

The other big movers tend to be smaller stocks the size of TravelZoo - with the very large exception of Netflix. The full Top Ten:

1. TravelZoo: 13.0 percent
2. Netflix: 12.8 percent
3. Stamps.com: 12.6 percent
4. iRobot: 12.2 percent
5. Synchronoss Tech: 11.9 percent
6. Sierra Wireless: 11.8 percent
7. Glu Mobile: 11.8 percent
8. Fossil: 11.7 percent
9. Skechers USA: 11.5 percent
10. First Solar: 11.4 percent

The Winning Sectors

Despite all the good economic news and the continued strength of the stock market, earnings growth is expected to slow to a crawl this year for large U.S. companies. In fact, during the first quarter of 2019, earnings per share declined from a year earlier for most of the S&P 500’s sectors, six out of the total of eleven.

Which sectors were able to grow earnings? These are the fortunate five:

• Health care, 9.8 percent
• Real estate, 7.4 percent
• Financials, 6.2 percent
• Industrials, 5.9 percent
• Information technology, 4.0 percent 

According to S&P Global Market Intelligence, only three of these sectors are expected to continue to show earnings growth when the second-quarter numbers are revealed: Financials, Health care, and Industrials.

Optimizing Your Social Security Strategy

Have you thought about when you'll start taking Social Security? According to a new report from United Income, almost all American retirees claim Social Security at the wrong time. The upshot is that they will miss out on a collective $3.4 trillion in benefits before they die.

While they can tap their benefits as early as age 62, retirees could boost the size of their checks for every year they wait until age 70, when they can get the maximum benefit. The advantage in waiting is substantial: A person eligible for a $725 monthly check at 62 could get $1,280 if they wait to start at age 70.

Only 4 percent of U.S. retirees are waiting until age 70 to claim Social Security, but 57 percent should be doing so, the report calculated. Meanwhile, more than 70 percent start taking checks before turning 64, a time when ideally only 6.5 percent of retirees should be cashing checks. The lost income from these less-than-optimal decisions amounts to about $111,000 per household, the researchers estimate.

The June Jobs Report

The employment picture bounced back strong in June, following a disappointing month of May, according to figures out this morning from the Bureau of Labor Statistics. The American economy added 224,000 jobs last month, after adding just 24,000 jobs in May. The headline unemployment rate ticked up to 3.7 percent.

All told, for the first half of 2019, we have averaged a solid 172,000 new jobs per month. That's down a bit from the strong pace of 223,000 jobs per month we saw in 2018, although the June report was back to that level.

The leading industry for job growth last month was health care, which added 35,000 jobs. Employment in transportation and warehousing expanded by 24,000 in June, while construction added 21,000. Over the past 12 months, construction employment has increased by 224,000.

Thoughts for Independence Day

"Those who expect to reap the blessings of freedom must undergo the fatigue of supporting it." ~ Thomas Paine

"Freedom is nothing but a chance to be better." ~ Albert Camus

"Men first crossed the Atlantic not to find soil for their ploughs but to secure liberty for their souls." ~ Robert J. McCracken

The First Half's Biggest Losers

Yesterday we looked at the best stocks for the first half of 2019; today we present the biggest losers. None of these fell by nearly as much as the best performers rose, but look at what a rough six months it's been for retail:

1. Nordstrom, down 31 percent
2. Mylan, down 31 percent
3. Gap Inc., down 30 percent
4. Kohl's Corp., down 28 percent
5. Kraft Heinz, down 27 percent
6. Macy's, down 25 percent
7. AbbVie Inc., down 22 percent
8. Foot Locker, down 22 percent
9. ABiomed, down 22 percent
10. Kroger Co., down 21 percent

The First Half's Biggest Winners

As we mentioned yesterday, this was a blazing first half for the stock market, with the S&P 500 rising by 17.3 percent. Here are the ten best-performing stocks in the S&P over the first six months of 2019:

1. Coty, up 105 percent
2. Xerox, up 81 percent
3. Chipotle Mexican Grill, up 68 percent
4. Advanced Micro Devices, up 67 percent
5. Anadarko Petroleum, up 63 percent
6. Cadence Design Systems, up 61 percent
7. Hess Corp., up 60 percent
8. MSCI Inc., up 60 percent
9. Total System Services, up 58 percent
10. Dentsply Sirona, up 55 percent

The Blazing First Half

With a gain of about 6.9 percent, the S&P 500 index notched its best June since 1955, when the benchmark rose 8.2 percent. The Dow Jones Industrial Average put up its best June gain of 7.2 percent since 1938 when the blue-chip benchmark surged 24.3 percent.

That capped off the best first half of a year since 1997 for the S&P, rising 17.3 percent. All 11 of the S&P 500 sectors rose in the first half of the year, with tech rising more than 26 percent to lead the gains. Energy was the market’s laggard in the first half, rising just 7.1 percent.

Meanwhile, the Dow Jones industrial average registered a 14 percent gain. But that trailed the Nasdaq composite index, which led everybody with 20 percent.