The Economy and Stocks: Under the Covers a Broad Rally

In July, the S&P 500 lost 0.7% while GDP for the second quarter improved to an annualized gain of 1.9%.

Only six of twenty-five major market sectors went down in July. This was a big change from June when twenty-two of the twenty-five sectors were in the red. Major losses by only two sectors - insurance (-28%) and energy (-34%) - could explain the stock market's July losses. But most of the market gained in July.

Last year, GDP growth was much higher at approximately 4%. The second quarter's 1.9% performance looks lack-luster by comparison. Job market weakness and an increase of more than a point to 5.7% in the unemployment rate has lead many to be fearful of a recession. But these two items point to underlying economic strength:

• June factory orders increased by 1.7% compared to a revised increase of 0.9% in May. Economists had expected only a 0.7% increase for June.
  
• Productivity increased strongly during 2008 at an average rate of 2.5% annually. By contrast, the average productivity rate during the six U.S. recessions since 1970 averaged only 0.8%.

The U.S. economy is recovering from the single quarter of mild contraction (only -0.2%) during the fourth quarter of 2007. Job market weakness is always one of the last to improve during an economic trough.