WE’RE NOW THROUGH THREE QUARTERS OF THE YEAR and, contrary to what you may be hearing on the television, the economy is booming and showing no signs of slowing dramatically any time soon.
As was the case in the second quarter, many economists are expecting GDP to have grown at more than 4 percent annualized in the third quarter. GDP is the measure of all of the goods and services produced in an economy, and the pace of growth has quickened this year. While we don’t think 4 percent is sustainable in the long-term, we do expect continued growth in the 3-3.5 percent range for the next 18-24 months.
Corporate profits are up 25 percent year-over-year, which are driving stock prices higher. Those manufacturing jobs, that were supposed to be gone forever, are coming back. Unemployment is at rock bottom, and unemployment rates among minority groups are the lowest they’ve ever been. At the same time, median household incomes are starting to rise. Lower tax rates, coupled with massive deregulation, are making the business environment as conducive to growth as they’ve been in a generation.
It’s generally accepted that a recession is defined as two consecutive quarters of negative growth. While recessions are a natural part of the economic cycle, at this point, we think, it would take something cataclysmic to send the economy from its current pace of growth into a negative growth situation. We don’t see anything on the horizon which we believe indicates a recession is imminent. The far more likely scenario is that the Fed will eventually raise rates too high, which will slow growth until it eventually goes negative.
While the Fed is currently raising rates, it should be noted that interest rates are still historically low, and are far from what would be considered a threat to continued growth. The Fed is raising rates for two reasons. First, interest rates are one of the primary levers the Fed has to help buoy the economy during a recession. With interest rates so low for so long, the Fed was missing the most important tool in its toolbelt because, if a recession were to occur with rates near zero, it would have no way to lower rates further. So, reloading for the next economic slump gives the Fed the ability to take appropriate action when the time comes.
The second reason to increase rates (and currently the lesser of the two) is to rein in a runaway economy. When an economy is growing “too fast”, the Fed can raise rates, which increases borrowing costs, as a way to throttle growth.
Fear mongering seems to be in high gear this year, as it is in every election year. It’s important that you tune out the noise, and try to keep politics out of your investments. Regardless of how the elections go, your goals remain the focus of your financial plan.
In order to win elections, politicians must mobilize voters, and nothing does that quite like fear. The far left wants you to believe that Trump is destroying America, while the far right tells you he’s the only one who can save it. Some want you to believe that everyone to the right of Bernie Sanders is a fascist, while others tell you everyone left of Ted Cruz is a socialist. Every election I can remember has been billed as
“the most important election of our time.”
Markets generally don’t care. Yes, Wall Street has its preference, but what businesses care more about is certainty, and the ability to plan for the future with some understanding of what the business landscape will look like. If the landscape changes, companies will still function, they just may not be as profitable.
For all the fear about this election, the most likely outcome, based on polling available today, is gridlock and a continuation of the policies and laws in place today. That is not a bad thing, from a purely economic standpoint. Gridlock is easy to plan around.
Democrats seem poised to take the House and may end up holding a slim majority in the Senate but, even with both houses, they will not pass any wish-list legislation without a veto-proof majority, which they simply will not have. Net result: Nothing.
For the remainder of the year, we see a bumpy road, but ultimately positive results. Stock indices hit all-time highs in the third quarter, and we think the conditions for growth will remain good as we enter 2019.
Continue to stay focused on your long-term financial goals, and work with your independent financial advisor to make changes to your strategy as conditions change, but be wary of making any changes rooted in fear.
Securities offered through Cadaret, Grant and Co., Inc. Member FINRA/SIPC. Advisory services offered through Sterling Manor Financial, LLC, an SEC registered investment advisor or Cadaret Grant and Co., Inc. Sterling Manor Financial and Cadaret, Grant are separate entities. This article contains opinion and forward-looking statements which are subject to change. Consult your investment advisor regarding your own investment needs.
