Q1 2017 Newsletter
With the close of the first quarter, the equity markets have responded positively so far this year. First, improving economic trends and an upturn in corporate profits have benefitted investor confidence. Second, but to a lesser degree, the market has reacted to expectations of tax reform, infrastructure spending and deregulation benefits. And finally, global markets are experiencing an upturn in economic activity.
On the political front, while tax reform is next on the agenda, national debt levels will probably hold back the scale of the potential tax cuts. In addition, the amount of infrastructure spending may be muted as well. Both of these areas will impact future growth, but the extent is dependent on what is passed in Congress.
I referenced in my last newsletter that the overlooked story for 2016 was a U.S. economy on the verge of breaking out. With leading economic indicators rising, our prediction for improved industrial production is coming to pass. The indicators suggest that the nascent rise in U.S. industrial production may continue through the end of this year. Furthermore, global economies are beginning to show signs of life. According to JP Morgan, for the first time in 15 years, European productivity is rising faster than real wages. This should help stimulate growth. Additionally, China’s industrial profits jumped sharply earlier this year showing an improving growth pattern. Coupled with rising wages and an employment picture that continues to brighten, we have a welcome scenario for consumers and the stock market alike.
However, along with rising growth and employment come risks that could slow down growth – if not now, eventually. First, a return to “normalcy” and traditional monetary policy will necessitate higher interest rates which will nibble at economic growth. Second, recent news suggests the Federal Reserve is finally considering unwinding some of its $4T balance sheet which ballooned after the financial crisis. Third, as employment continues to rise and wages grow, we would expect inflationary pressures. Less directly, we also study the growing populist movement in Europe and the impact that may have on the upcoming French election, and the future of the European Union.
In closing, the issues and opportunities present at the end of last year remain largely intact. While potential headwinds are there, investors remain largely focused on corporate profits and the potential for reform and deregulation. Further gains in the labor market and an improving economy are both tailwinds for the stock market. To what level will the markets go? The answer to that question depends on the pace of Federal Reserve tightening and the ability of the White House to get deregulation, tax cuts, and infrastructure spending pushed through Congress. Given the political gridlock, we would expect modest returns this year with an increase in volatility and uncertainty.
As always, we thank you for your trust. If you have any questions or if there are financial decisions that you must make, please feel free to call us and utilize us as a resource.
Marc Henn CFP ®, President