By Paul Single

Key Takeaways:

  • Economic indicators flashing green, geopolitics a concern
  • Tax cuts a positive, but exact effects are still unknown
  • Consumer confidence rising as stock market surges ahead

The economy finished 2017 in good shape, achieving a so-called “Goldilocks” performance of neither too hot nor too cold. Economic growth topped 3.0% in the middle two quarters and is also expected to be strong for the recently concluded quarter. The unemployment rate is at 4.1%, a 17-year low; inflation is stable and below the Fed’s target rate of 2.0%, and consumer confidence is at its highest since the early 2000s. Meanwhile, the global economy is on an upward swing, which is boosting our exports; and recent reductions in corporate taxes should help future growth.

With all the good news, the big question for many investors is: “How long will this last?” Unemployment is expected to continue falling and should pierce the 4.0% level in the first half of 2018 (see chart). There has not been a “3” handle on the unemployment rate since 2000. Inflation has been a relatively low 1.5% (see chart) and is expected to move toward the Fed’s target level of 2.0%, but not much above it. Consumer confidence, which is closely linked to stock market performance, is expected to continue riding the upward trend in equities.

IMAGE_QU 4Q17-Single Chart 1

We see two possible caveats to this optimistic outlook. First, geopolitical risks are high. The U.S. is at loggerheads with North Korea, and Saudi Arabia is going through a consolidation of power. Finally, there are concerns with Russia and the Baltic States, China and territorial disputes, and the United States with its protectionist trade views.

The other caveat surrounds new tax policy. It will provide an economic boost, but how much? We expect it to increase GDP in 2018 by 0.4% (in total). Half of that will come from the tax cuts and half will come from higher federal spending. Those who were strong supporters of the plan expect much more growth. We think growth will be moderately higher due to increased capital spending, which will drive economic growth to higher levels.

IMAGE_QU 4Q17-Single Chart 2

Read the next article in this series: Bull Market in U.S. Equities Likely to Continue

Important Disclosures

The information presented does not involve the rendering of personalized investment, financial, legal, or tax advice. This presentation is not an offer to buy or sell, or a solicitation of any offer to buy or sell, any of the securities mentioned herein.

Certain statements contained herein may constitute projections, forecasts, and other forward-looking statements, which do not reflect actual results and are based primarily upon a hypothetical set of assumptions applied to certain historical financial information. Certain information has been provided by third-party sources, and, although believed to be reliable, it has not been independently verified, and its accuracy or completeness cannot be guaranteed.

Any opinions, projections, forecasts, and forward-looking statements presented herein are valid as of the date of this document and are subject to change.

There are inherent risks with equity investing. These risks include, but are not limited to, stock market, manager, or investment style. Stock markets tend to move in cycles, with periods of rising prices and periods of falling prices. Investing in international markets carries risks such as currency fluctuation, regulatory risks, and economic and political instability. Emerging markets involve heightened risks related to the same factors, as well as increased volatility, lower trading volume, and less liquidity. Emerging markets can have greater custodial and operational risks and less developed legal and accounting systems than developed markets.

Concentrating assets in the real estate sector or REITs may disproportionately subject a portfolio to the risks of that industry, including the loss of value because of adverse developments affecting the real estate industry and real property values. Investments in REITs may be subject to increased price volatility and liquidity risk; concentration risk is high.

Investments in Master Limited Partnerships (MLP) are susceptible to concentration risk, illiquidity, exposure to potential volatility, tax reporting complexity, fiscal policy, and market risk. Investors in MLPs are subject to increased tax reporting requirements. MLP investors typically receive a complicated schedule K-1 form rather than Form 1099. MLPs may not be appropriate investments for tax-advantaged accounts because of potential negative tax consequences (Unrelated Business Income Tax).

There are inherent risks with fixed-income investing. These risks may include interest rate, call, credit, market, inflation, government policy, liquidity, or junk bond. When interest rates rise, bond prices fall. This risk is heightened with investments in longer-duration fixed-income securities and during periods when prevailing interest rates are low or negative. The yields and market values of municipal securities may be more affected by changes in tax rates and policies than similar income-bearing taxable securities. Certain investors’ incomes may be subject to the Federal Alternative Minimum Tax (AMT), and taxable gains are also possible. Investments in below-investment-grade debt securities, which are usually called “high yield” or “junk bonds,” are typically in weaker financial health and such securities can be harder to value and sell, and their prices can be more volatile than more highly rated securities. While these securities generally have higher rates of interest, they also involve greater risk of default than do securities of a higher-quality rating.

Investments in emerging market bonds may be substantially more volatile, and substantially less liquid, than the bonds of governments, government agencies, and government-owned corporations located in more developed foreign markets. Emerging market bonds can have greater custodial and operational risks and less developed legal and accounting systems than developed markets.

As with any investment strategy, there is no guarantee that investment objectives will be met, and investors may lose money. Returns include the reinvestment of interest and dividends. Investing involves risk, including the loss of principal. Diversification may not protect against market loss or risk. Past performance is no guarantee of future performance.

Index Definitions

The Conference Board Leading Economic Index is an American economic leading indicator intended to forecast future economic activity. It is calculated by The Conference Board, a nongovernmental organization, which determines the value of the index from the values of ten key variables.

The Goldman Sachs Financial Conditions Index (GSFCI) is a weighted sum of a short-term bond yield, a long-term corporate yield, the exchange rate, and a stock market variable.

The Standard & Poor’s (S&P) 500 Index represents 500 large U.S. companies. The comparative market index is not directly investable and is not adjusted to reflect expenses that the SEC requires to be reflected in the fund’s performance.

Indices are unmanaged, and one cannot invest directly in an index. Index returns do not reflect a deduction for fees or expenses.