Economic Update-Fall 2017
In spite of the many predictions of doom and gloom earlier this year, the global economy continued its synchronized expansion. The IMF (International Monetary Fund) projects global growth will be 3.5% for 2017 with the US growing at a rate of 2.1%. We haven’t reached our targeted 3% growth number in the US, but the current state of the economy is healthy considering the Fed raised interest rates, essentially removing stimulus from the system.
There are several reasons to remain optimistic for the outlook to continue in a positive direction. Interest rates still remain historically low, inflation is benign and subdued commodity prices are a boost to consumer spending. These are a definite tailwind since 2/3 of our economy comes from consumer spending. Housing, construction and infrastructure are holding steady to provide some additional lift. Based on these conditions, the US is likely to remain in the late phase of the business cycle without a recession in the near term.
However, there are a few caution lights flashing on the market dashboard. Growth in US stocks have pushed the valuations to elevated levels. Markets can remain there for an extended period of time, but we must have earnings growth to support the move in stock prices. The current expansion we are in (post-2008 until now) is second in terms of length and return (99 months and +258%) using the S&P 500. The other statistic to keep in mind is the S&P 500 which usually sees a greater than 10% drop, or corrects itself, at least once per year. The last time we had a move of that magnitude was June 2016 when Brexit passed in the UK. We are definitely overdue for pullback based on the data.
With all these things in mind, what should you do? First, we suggest re-balancing your winners/losers. Second, know what you own in your portfolio and be proactive is assessing the amount of risk you have. Understanding where your portfolio is exposed to volatility in the market place will help you prepare in the event of a drop. Lastly, put some money in a safer haven to take advantage of any drop that might happen. We can’t predict when volatility will return but we can plan for it.
“Economic Update-Fall 2017” was published in the September 2017 issue of Life on the Green magazine, a social publication for the residents surrounding The Woodlands, Country Club, Player Course, where Dan is a resident and is a featured monthly contributor.