Dollars and Sense: Will tepid economic growth cool the markets?

Slow growth. It was another week of mediocre economic news. We got a report last week that the economy was growing, but only at a tepid 2.3 percent, slower than the 2.9 percent the Federal Reserve had previously predicted.

Whither the fed? The Federal Reserve met last week and concluded its 2-day gathering by saying it would not raise interest rates this month. Some analysts are still expecting a September rate hike, though that long-predicted hike is now looking less likely as the economic data come in weaker than expected. We will get a new unemployment report on Friday, and that will give us a new and important data point. Another key indicator is wage growth, which has been stagnant for the past few years. We got another report from the Labor Department last week saying that trend continued for another quarter, and it appears consumer confidence has topped out. U.S. consumer sentiment fell in July after being on a pretty steady rise for the past few years. All in all, not much there to encourage a rate hike.

Earnings season also mediocre. Earnings season is headed into the home stretch this week, and so far about the best you can say is that it lived down to expectations. We’ll see earnings rise about 1 percent over last year, which is very slow growth. Revenue likely will be down as much as 3 percent, and a lot of forward-looking guidance has been disappointing. That’s why we’ve seen such choppy stock-price performance for months. But for the month of July, things didn’t end all that badly. The Nasdaq rose 2.8 percent for the month, and the S&P rose 2 percent. The Dow was up the least, 0.4 percent and remains in negative territory for the year.

The week ahead. More for curiosity’s sake than for any real insight or impact, I will be watching Greece today when the Athens Stock Exchange reopens. That’s a big step toward normalcy in that country. The exchange has been closed since June 29. Also this week, I’ll be watching for the July unemployment report, due Friday. As we noticed last month, it won’t be the unemployment rate, now at 5.3 percent, that will get most of the attention. The employment participation rate, at historic lows, will get the scrutiny. That number, in the low 60s, needs to come up. Analysts want to see wage rates rise, too. Also, as the month has turned over, we’ll get a lot of July reports this week, including auto and truck sales, factory orders, and foreign trade numbers. Most analysts say there’s not a lot of upside in the markets. Price-to-earnings ratios remain historically high, and even with the delays, an interest rate hike likely is coming by the end of the year. So even if the data are good, the markets are not likely to surge. But if we get several bad reports in a row, we could see the markets drop more than normal on these normally routine monthly reports.

Listen to “Dollars and Sense” on The World and Everything in It.