As the U.S. economic recovery moves into its later stages, inflation has emerged at a surprisingly slow and inconsistent rate, befuddling investors who have watched the expansion set the stage for anticipated price and wage growth. Only recently has data emerged indicating that pricing pressures have approached, and in some circumstances exceeded, target levels from monetary policymakers.
The bull market continues to defy the skeptics and is now nearing a major milestone. On August 22, 2018, this bull market can overtake the bull market of the 1990s as the longest ever. From tariffs to trade wars to inflation to a flattening yield curve to a global economic slowdown, the headlines continue to cast doubt on the sustainability of this economic cycle and bull market. Although we see several potential stumbling blocks, we continue to believe this economy and stock market rally have plenty of fuel left in the tank.
The Fed announced last Wednesday that it would keep interest rates unchanged, a decision that markets largely expected. In its statement, the Fed upgraded its view of the economy to growing at a “strong” rate for the first time since 2006, a view encapsulated by last quarter’s strongest gross domestic product (GDP) growth since 2014. Fiscal stimulus has fueled strong business, consumer, and government spending, and the job market has continued to tighten, with the unemployment rate sitting at its lowest point of the expansion.
Economic reports released in July 2018, largely reflecting economic activity in June, provided evidence of accelerating U.S. economic growth over the second quarter. The U.S. economy, measured by gross domestic product (GDP), grew 4.1% in the second quarter, its strongest since the third quarter of 2014 and fifth strongest quarter of the expansion.
The Portfolio Compass provides a snapshot of LPL Financial Research’s views on equity, equity sectors, fixed income, and alternative asset classes. This monthly publication illustrates our current views and will change as needed over a 3- to 12-month time horizon. Read recent issue...
For the second half of 2018, continued economic growth and market gains may bring the heightened drama of increased volatility. So while there may be some twists and turns ahead at LPL Research we expect the positive fundamentals may prevail.
An important shift has taken place in this economic cycle. The Federal Reserve (Fed) was finally able to start following through on its projected rate hike path, raising rates twice in just over a three-month period. By doing so, the Fed showed increasing trust that the economy has largely met its dual mandate of 2% inflation and full employment, that the economy is progressively able to stand on its own two feet, and that fiscal policy may now provide the backstop to the economy that monetary policy has provided throughout the expansion.
Stock markets, bond markets, the economy, policy — some years they push and pull on each other lightly as markets follow their own path; in others, one influence, such as monetary policy, dominates. But sometimes, often following a period of change, understanding the pushes and pulls and how they interact becomes a key to reassessing market dynamics for the next year and beyond.
During any presidential election, you can expect a barrage of promises from the yard sign endorsements, bumper stickers, stump speeches, and media headlines. All pledge to improve the economy, provide better education for all, and preserve the environment.
The Economic Cycle - We believe we are in the mid-to-late stage of the current expansion, but we are still seeing some early cycle and late cycle behavior. Extended loose monetary policy, inflation, and employment growth are still exhibiting early cycle behavior, while some items relating to corporate profits are showing late cycle behavior, although they may be reset if profits improve.