Increased business capital expenditures, or “capex,” remain one of the most important pieces for improving the long-term growth trajectory of the U.S. economy. Capital expenditures help increase productivity, and improved productivity is the foundation for sustainable higher growth for developed economies. Both survey and hard data continue to confirm that we might be seeing a rebound in capex, but how can we know it’s sustainable? The answer may be in our beach reading. Like the veteran detective in a favorite page-turner, we look for means, motive, and opportunity.
Capital investment is accelerating, a trend we believe should continue. One of the most encouraging aspects of the U.S. economy currently is that capital spending is accelerating just as some tailwinds are starting to kick in. As we discuss in this week’s Weekly Economic Commentary, capital expenditures (capex) are being supported by several factors, including strong earnings growth, corporate tax cuts, immediate expensing of capital investments, repatriation of overseas cash, high business confidence, and deregulation. So how should investors play this theme?
A combination of higher interest rate sensitivity amid rising rates and negative supply/demand dynamics have weighed on investment-grade (IG) corporate bonds year to date, but the remainder of the year may be more pleasant for investors. IG corporate bonds have been the worst-performing domestic segment of fixed income so far in 2018, lagging Treasuries, mortgage-backed securities, and the broad high-quality fixed income market overall [Figure 1].
Economic reports released in May 2018, largely reflecting economic activity in April, showed continued solid economic growth in the U.S. and provided evidence of a pickup in growth from first-quarter levels that were depressed by seasonal factors.
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...
OVER THE PAST EIGHT YEARS, extraordinarily accommodative monetary policy has served as the primary catalyst for spurring continued economic growth in the U.S. and around the globe. Although the economic expansion has delivered steady gross domestic product (GDP) growth, consistent returns for the broad stock market, and an improving job market, the expansion itself has been lackluster.
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.