Economic data conflicted dramatically with the stock market this week.
Growth in the third quarter clocked in at 3.5%, a comedown from the 4.2% growth rate in the second quarter, but still a sound reading. Yet stocks tumbled, with the S&P 500 entering a correction, down more than 10% from the record high reached on Sept. 20.
The cognitive dissonance actually makes sense. The GDP report is backward-looking. The third quarter ended in September and included much of the summer. The stock market cares a lot more about the future, with investors trying to guess whether revenue and profit in the next quarter will be higher or lower than expected. The market seems to be saying that investors think the best is behind us.
The past looks good, but the future is sketchier. For this reason, our Trump-o-meter this week reads MEDIOCRE, our third-highest rating.
The GDP report showed that consumer spending is strong, reflecting a robust labor market and upbeat consumer confidence. And inflation remains low, which is unusual in a growing economy.
[Check out the president’s grade on our Trumponomics Report Card.]
But the pace of spending might not be sustainable, and an unusually large buildup in business inventories that contributed to growth in the third quarter probably won’t last, either. Business spending on software was strong, but spending on everything else was weak, and there’s no sign of the boom in business investment President Trump and his fellow Republicans predicted as a result of the tax cuts they passed last year. “If we were going to see massive capital spending, we should have started to see it already,” economist Joel Naroff of Naroff Economic Advisers wrote in a note to clients. “We haven’t.”
Investors, for their part, are worried about similar things. Amazon and Google parent Alphabet, for instance, each reported profits for the third quarter that beat expectations. Yet both stocks sold off on worries about slowing growth, including Amazon’s hint that holiday retail sales might underperform.
That might be a normal sign of the economy cooling in its ninth year of expansion. But Trump has promised sustained GDP growth of 3% or more, along with rising incomes as a sharp cut in the corporate tax rate trickles down to workers. For now, investors are betting it won’t happen. Now we’ll see if Trump can talk up an economy that otherwise seems to be losing steam.
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Rick Newman is the author of four books, including “Rebounders: How Winners Pivot from Setback to Success.” Follow him on Twitter: @rickjnewman