Last week may have been short due to the holiday, but that doesn’t mean it lacked for headlines. The latest milestone on the Dow Jones Industrial Average, 18,000, was a holiday gift that took just 173 days to achieve, with the Dow having pushed through 17,000 in early July.
Remember that these milestones, as headline-grabbing as they are, become easier and easier to achieve as the numbers get larger and larger. To get to 19,000, we need just about 5.4% gain from the middle of last week, and 20,000 is only an 11% gain from there.
Tuesday was loaded with economic data. The big news was the GDP revision showing that, in the final analysis, the U.S. economy grew at a 5% annualized rate in the third quarter, which is the fastest quarter on record in 11 years (since the third quarter of 2003).
Plus, maybe more importantly, when you combine that with the 4.6% rate of growth in Q2, you’ve got a very strong six-month period for growth. Why is this important? Because it puts some meat on the bones of the argument that stock prices reflect growth in the economy, in consumerism and in confidence.
While corporate profits hit an all-time high in the third quarter, it’s after-tax profits that tell a better tale because what’s reported to the IRS is something corporations never want to inflate, as that would mean they’d pay more in taxes. The latest report shows after-tax profits have rebounded since the huge decline during the wintry first quarter, but they are still below peak levels of a year ago. Hopefully, the strengthening consumer will push profits even higher in Q4.
Though durable goods orders were punk in November, remember that the measure has been influenced, as always, by transportation orders (airplanes). So, month-to-month numbers don’t give the full picture. The longer-term trend shows a steadily expanding manufacturing sector across the country.
Consumer sentiment, another measure that gets more attention than it deserves, was also strong, at nearly the best reading in eight years. Sentiment purports to measure your likelihood of buying something today, as opposed to confidence, which is your likelihood of buying something in six months or so.
Of course, it’s the holiday season — so, I think it goes without saying that people are probably in the consuming mood this year, when the market has been up and inflation has been low along with gasoline prices. Plus, a report on incomes showed that they, too, are continuing to rise and are up at the highest rate year over year since the end of 2012. Spending remains on a more moderate, even pace, but if incomes continue to grow, then spending should accelerate. All good news.
Housing continues to show anemic growth levels as existing home sales rose 2.1% over the past year. But as we saw in the third quarter, we don’t need the housing sector to be firing on all cylinders to get strong economic growth when consumers are spending and manufacturing is expanding.
In the chairman’s letter for Vanguard Mid-Cap Growth Fund (VMGRX), which Vanguard adopted many, many years ago, Chairman Bill McNabb gives credit to the two management teams on the fund for its performance, saying, “The fund’s ten-year record reflects the advisors’ ability and knowledge.”
The problem is that Chartwell Investments Inc. has been on the fund for a bit less than nine years, and William Blair & Company, L.L.C. has only been on the fund for a bit more than eight years. Since Chartwell was brought onto the fund on Feb. 1, 2006, the fund’s record has been mixed, in my book. Still, Vanguard isn’t telling shareholders that. By the way, Chairman McNabb doesn’t own VMGRX shares and neither do we.
Senior Editor Dan Wiener and Editor/Research Director Jeffrey DeMaso publish The Independent Adviser for Vanguard Investors, a monthly newsletter that keeps abreast of recent developments at Vanguard, and the annual FFSA Independent Guide to the Vanguard Funds.
