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Green Lights Through the Noise

July 10, 2018, 11:36 am

Last week, all it took was an extra day to think. The Independence Day holiday created space for Wall Street to focus on the essentials and shake off the chatter that’s dominated trading in recent weeks, liberating the market as a whole.

Where it had been all about rotation out of areas perceived as more volatile or risky, last week saw the tide roll back into those very spaces. Investors know that this is where the growth and dynamism in the economy are concentrated. It’s where the potential upside is strong enough to rise above developments outside the market. As a result, the technology-rich NASDAQ was once again within 3% of record levels while the more conventional Dow industrials spent the week in sight of correction territory.

Trade policy has been the drag on the Dow, home to so many of the world’s great exporters. World-class stocks like Caterpillar (CAT), 3M (MMM) and even Johnson & Johnson (JNJ) are down 15%-25% on fears that rising commercial barriers will make it harder for them to operate, and last Thursday night’s steps toward a trade war with China leave those stocks back on the defensive.

As for the central bank, last week reminded us just how far the U.S. economic situation has diverged from other major players around the globe. Minutes from the Fed’s June meeting revealed that while trade is a concern, it’s only the uncertainty around policy that gnaws on the business leaders who talk to Fed Chairman Jay Powell. The policies themselves haven’t been a drag at all. If anything, our central bank now sees the odds of rising inflation as a more persistent threat than any economic slowdown on the horizon.

I’m there with them. Some reports indicate that gross domestic product (GDP) surged at an annualized rate of 4.8% last quarter, which is more robust than we’ve seen in ages. Friday morning we found out that the U.S. economy hired another 213,000 people, beckoning the unemployed back to work for the first time in years. That’s a clear sign of U.S. dynamism and a justification for the first cycle of rising interest rates since the 2008 credit crunch.

If this is the new normal, I love it, and we’ll find out more as the next earnings cycle is about to get underway. The reporting season starts this Friday with the banks, and I can’t wait to hear what they have to say.

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