The U.S. economy finished one of the best years of a decade-long economic expansion, growing at a commendable pace in the fourth quarter and defying slowdowns elsewhere in the world.
Pick-up in consumer spending and an uptick in business investment in software, research and equipment boosted economic growth. Consumer outlays in particular improved on a steady job market, healthier household finances and tax cuts. Hence, it seems judicious to invest in areas where consumers have led the way.
GDP Matches Fastest Growth Since Recession
According to the Bureau of Economic Analysis, U.S. GDP expanded a 2.6% annual pace in the fourth quarter of 2018. It was way more than analysts’ expectations of a 1.9% growth rate. The U.S. economy had expanded at a solid 3.4% clip in the third quarter, which followed an even better 4.2% growth in the second quarter.
A slight drop at the end of 2018, however, kept the economy from clocking 3% annual growth rate for the first time since 2005. But, GDP for the full year did match the growth rate attained in 2015, which was the highest since the 2007-2009 Great Recession.
The fourth quarter growth rate is certainly laudable. After all, such steady growth was achieved despite slowdown in global economic growth, consistent turbulence in the financial markets, trade-related disputes with China and the longest partial government shutdown in history.
In fact, the government shutdown that began shortly before Christmas may have cost the economy 0.1 percentage point of growth in the fourth quarter, added the Bureau of Economic Analysis.
Consumer Spending Drives GDP, Business Investments Ramp Up
Consumer spending boosted economic growth. Consumer outlays grew a healthy 2.8% in the fourth quarter as Americans splurged on cars and trucks, health care, clothes and financial services, among other things. Disposable personal income, by the way, increased $225.1 billion in the fourth quarter, compared with an increase of $190.6 billion in the preceding quarter.
Spending improved mostly due to a strong jobs market, household income gains and tax cuts. According to the Bureau of Labor Statistics, employment gains in 2018 turned out to be the strongest in the last three years. In fact, if we consider December’s job additions of 222,000, November’s 196,000 and this January’s 304,000, the labor market has posted the best three-month stretch during an economic expansion dating back nine-and-a-half years ago.
(Source: Bureau of Labor Statistics)
The $1.5-trillion tax cut package that Trump got Congress to pass last year also did put a lot of money in consumers’ pocket. The tax bill trimmed the ultra-rich individual tax bracket from 39.6% to 37%, while the middle class has been excused from paying hefty taxes.
In the meantime, companies increased investments in equipment and product research, offsetting the drop in investments in new construction. Business investment climbed 7% in the year, while investments in software, research & development increased 7.7%, surpassing the 7.5% gain in 2016 — the best since 2000’s 9.5%.
5 Solid Choices
As consumers bump up their spending on cars, healthcare and garments, to name a few, investing in stocks from such areas seems prudent. Significant increase in expenditure on software, research and development also calls for investing in such spaces.
We have, thus, selected five solid stocks from the aforesaid areas that flaunt a Zacks Rank #1 (Strong Buy) or 2 (Buy) and also a VGM Score of A or B. Here V stands for Value, G for Growth and M for Momentum and the score is a weighted combination of these three metrics. Such a score allows you to eliminate the negative aspects of stocks and select winners.
General Motors Company (GM - Free Report) designs, builds, and sells cars, trucks, crossovers, and automobile parts worldwide. The company has a Zacks Rank #2 and a VGM Score of B. The company’s earnings growth rate for the past five years have been 15.5%, more than the Automotive - Domestic industry’s gain of 8.2% (read more: Wall Street Takes Notice of These 4 Stocks - Should You?).
Charles River Laboratories International, Inc. (CRL - Free Report) provides drug discovery, non-clinical development, and safety testing services. The company, which is part of the Medical Services industry, has a Zacks Rank #2 and a VGM Score of B. The company’s expected earnings growth rate for the current year is a steady 7.5%.
DSW Inc. (DSW - Free Report) offers dresses, casual and athletic footwear, and accessories under various brands for women, men, and kids. It also provides handbags, hosiery, jewelry, and other accessories. The company has a Zacks Rank #1 and a VGM Score of A. The company’s expected earnings growth rate for the current year is 16.5%, more than the Retail - Apparel and Shoes industry’s projected gain of 10.6%. You can see the complete list of today’s Zacks #1 Rank stocks here.
Shoe Carnival, Inc. (SCVL - Free Report) operates as a family footwear retailer in the United States. The company has a Zacks Rank #2 and a VGM Score of A. The company’s expected earnings growth rate for the current year is 62.4%, higher than the Retail - Apparel and Shoes industry’s projected growth of 10.6%.
Boingo Wireless, Inc. (WIFI - Free Report) provides wireless connectivity solutions for smartphones, tablets, laptops, wearables, and other wireless-enabled consumer devices. The company has a Zacks Rank #1 and a VGM Score of B. The company’s expected earnings growth rate for the current year is 71.4%, way higher than the Internet - Software and Services industry’s projected growth of 8.8%.
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