Implications: Today's final GDP report for the third quarter had real economic growth at a 3.4% annual rate, just below consensus expectations, but still the second fastest reading in four years and the second consecutive quarter of 3%+ real growth. The government made only minor changes to the components of GDP, but negative revisions slightly offset positive ones. The more important news in the report was that corporate profits were revised slightly higher from prior estimates, growing 3.5% in Q3 and up 10.4% from a year ago, the fastest growth rates since 2014 and 2012 respectively. The upward revision was mainly due to the nonfinancial corporate sector in the US, a bullish sign for capital investment in the year ahead. Meanwhile, thanks to the tax cuts, after-tax profits are up nearly 20% in the past year. Plugging the new profits data into our capitalized profits model suggests US equities remain cheap, not only at today's interest rates but even using a 10-year Treasury yield of 3.5%. In other words, the correction we have seen since mid-September is a buying opportunity; we expect the stock market to move higher in the months ahead. In terms of monetary policy, the Fed should see today's report as a confirmation that they made the right decision to raise short-term rates earlier this week. Nominal GDP growth (real growth plus inflation) was revised to a still healthy 4.9% annual rate in Q3 from a prior estimate of 5.0%, is up 5.5% in the past year, and up at a 4.8% annual rate in the past two years, leaving the Fed plenty of room for a few rate hikes in 2019. In other news yesterday, initial jobless claims rose 8,000 last week to 214,000. Meanwhile, continuing claims rose 27,000 to 1.69 million. These figures are at very low levels and consistent with continued robust job gains in December.
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