The bottom line for the week is the economic picture looks better today than it did a few months ago. Earnings so far have been in general stronger than was expected, but we are still dealing with an equity market that is in overbought territory and valuations remain in the top 0.7% of all time with volatility depressed to an unprecedented degree. While we clearly prefer to see the market go up rather than down, we remain wary of such elevated valuations and exceptional conditions.
From an economic perspective, the big news for the week came this morning with the first estimate for third quarter GDP growth coming in at 3.0% versus the 2.5% expected. The significant beat was due in large part to inventory builds and a smaller trade deficit. The inventory build-up added 0.73% to GDP growth, compared to slightly over 0.10% in the second quarter. The weaker dollar during the quarter aided exports, which reduced the trade deficit, and added an additional 0.41% to GDP. Consumer spending slowed, in part due to the twin hurricanes, slowing to a 2.4% growth rate versus 3.3% in the second quarter. Home building contracted 6.0% after having declined in the second quarter as well. Pending home sales came in flat for September versus expectations for a 0.5% gain for the seventh month out of the past nine with sales flat or negative. The index for pending home sales is now at the lowest level since January 2015. The MBA mortgage application index confirmed the weakness in home sales this week with a 6.1% decline in purchases. On the plus side business investment in equipment increased 8.6%, the fourth consecutive increase.
Wednesday, the US Census reported preliminary durable goods new orders shipments, and inventories which revealed that nondefense capital goods shipments ex-aircraft continue to accelerate to the upside on a 3-month over 3-month basis, reaching the strongest growth levels since 2014. The year-over-year pace is the best since 2012 and total inventory/sales remains at post-crisis average, which gives us comfort that the inventory build in the GDP report isn’t something overly concerning.
