For the second quarter (Q2) of 2018, U.S. gross domestic product (GDP) grew by an annualized rate of 4.1%. This is an encouraging increase from Q1 growth of 2.2%. 2018 is on track to grow by 3% or more, which has not happened since 2005. This achievement was produced by strong consumer spending, increased business investment, robust government outlays, and substantial tariff-driven exports.
Is this U.S. Growth Rate Sustainable?
Tariff deadlines imposed by our trading partners in retaliation for U.S. tariffs caused a spike in U.S. exports to beat the increase in prices. This spike will not likely be repeated now that the tariff penalties are already taking place. Due to tariffs, U.S. steel and aluminum prices are up 33% and 11% respectively, hurting U.S. manufacturers that use these metals. Costs are rising on recreational vehicles, cars, bulldozers, washing machines, soda, beer, and more. Even so, U.S. corporate earnings are on course to grow by 20%+ for Q2, matching the strength of earnings growth in Q1. Beyond the volatility and weakness in some tech companies, the broader U.S. stock market is resilient as it approaches new highs. Apple just reported a 32% jump in profits for Q2 helping Apple stock to gain 3% in after-market trading on July 31. Apple is very close to reaching a $1 trillion market value, the first in world history. We celebrate this beacon driving U.S. stocks forward.
Tariff and Trade Developments
The recent meeting between President Trump and Euro Commission President Jean-Claude Juncker produced a tariff truce and a pledge to work toward zero tariffs between the U.S. and the EU. Europe will buy more U.S. soybeans and liquefied natural gas (LNG). If Trump will turn down the heat in the trade disputes, this will help sustain the U.S. GDP growth rate. There may be rapprochement with China too.
Stable Growth and the Bond Market
Our Class 4 funds, which make up the core of our Stable Growth strategy, showed solid returns in July. The Fed began hiking interest rates at the end of 2015 and has now increased rates by 1.75%. The yield on the 10-year Treasury, however, has only increased 0.50% over this same period, adding some measure of stability to the bond market. Bond funds continue to add important diversification, stability, and increasing yields.