How a Strong GDP Report Could Cascade.

The Upper Cascades in Virginia. Photo by: ForestWander.com. Wiki Commons. Used with permission.

​2Q 2018 GDP growth (advance) estimates will be released tomorrow morning. The estimates are falling between 2.7-3.8%. How will the report affect stocks? Your summer? The overall Economy? Will stocks soar, cascade or plummet?
 
Stocks
The first quarter 2018 GDP growth was 2.0%, so anything above that could spark a rally on Wall Street. Growth is good. A strong showing signals that the economy is strong and not buckling (at least yet) under the Tariff Wars. FYI: The advance estimates have a track record of coming in far higher than the actual data.

Interest Rates and the Federal Reserve Board Meeting. July 31, 2018 – August 1, 2018.
A strong GDP growth showing could prompt the Federal Reserve Board to raise interest rates. Whenever they do, Wall Street responds with a sell-off. According to the minutes and the financial projections from the June 14, 2018 meeting, Federal Reserve Board chairman Jerome Powell is determined to raise the Fed Fund rate. The rate is expected to hit 2.4% in 2018 (from the current 1.75-2.0%) and 3.4% by 2020.
 
The Yield Curve
If the Federal Reserve Board raises the Fed Fund Rate, the flat yield curve could go negative. All eyes are on that because there is a very strong correlation (almost 100%) between recessions and an inverted yield curve.
 
Tariff Wars
We won’t know the effect the Tariff Wars will have on GDP growth until at least the 3rd quarter because the tariffs only began on July 6, 2018. 3rd quarter GDP growth will be issued on October 26, 2018. The forecasters have already begun forecasting lower GDP growth, with the New York Federal Reserve Bank predicting that 3rd quarter 2018 GDP growth will be 2.4%.  That is lower than the 2nd quarter 2018 GDP growth expectations, and far lower than the projections that the 3.0% and higher GDP growth projections that the current Administration used to justify their tax cuts.
 
The bottom line is that a strong 2nd quarter 2018 GDP report could result in a Wall Street rally that is rather short-lived since the Federal Reserve Board meeting falls on the following week. The result could be a short rally the final days of July, followed by a pullback in early August, with even more trouble headed for the 3rd quarter report, which will be released at the end of October 2018. Of course, politicians want a strong economy to support the election. However, financial engineering and leverage can only carry an economy so far before the asset bubbles pop. I’ll keep you updated once the statistics come in on my social media pages at Twitter.com/NataliePace and Facebook.com/TheABCsofMoney.
 
Below are links to additional blogs that help to explain the significant economic headwinds that the U.S. (and all of the developed world really) are facing. Remember that recessions are rarely “crashes.” More often they are cascades, with a drop that steadies out to a new (lower) normal, followed by another dive and plateau, and on. By the time the headlines that we are in a recession hit, we’re usually near the bottom. So, if you wait for the headlines to protect your assets from the next downturn, it will be too late.
 
If you are interested in protecting your nest egg before the next recession, call 310-430-2397 to learn the ABCs of Money that we all should have received in high school. These easy strategies earned gains in the last two recessions and have outperformed the bull markets in between. Attend an Investor Educational Retreat and you can learn and implement these strategies in 3 fun-filled, life-transformational days, and go home with a financial foundation that can withstand the next economic storm.

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