Despite distracting headlines out of Washington, domestic equity markets marched to new record highs (for the S&P 500 & Nasdaq) during the quarter. Equity markets focused on the upward trend in GDP growth and robust corporate earnings (up over 15% year-over-year) that recorded the most profitable period in over five years. Historically, such periods of stable economic growth produce an environment that bodes well for stocks.
Economic Growth Forecast
Economic growth occurs when a country produces and consumes more than it did in the past, which typically corresponds with increasing corporate revenues, profits, and stock prices. Therefore, the real growth rate of the economy and its trend are essential components when determining the posture of our investment strategy.
The table to the left illustrates actual economic growth (Real GDP, year-over-year % change) for the past three quarters, as well as forecasts for the next three for both our economic model and the Bloomberg consensus (average of 156 bank, investment, and research companies).
The Federal Reserve also expects economic activity to expand at a moderate pace and thus raised the short-term fed funds rate 0.25% in June, the second increase of 2017. The hikes continue to be digested in an orderly fashion by the bond market with current forecasts calling for one or possibly two more hikes in 2017. Starting from such ultra-low levels (very accommodative), we believe short-term interest rates have a long way to go before they become restrictive to economic growth.
While our forecast is slightly higher than consensus, both illustrate positive economic growth. We expect the gradually rising trend to persist into early 2018, after which some form of fiscal stimulus will most likely be needed to maintain economic and stock market momentum.
While there is plenty of uncertainty in the news underscored by political gridlock in DC, multiple geopolitical risks such as North Korea, and a Fed that is trying to shrink a behemoth $4.5 trillion balance sheet, markets continue to climb this wall of worry. With liquidity ample, financial conditions fairly loose, earnings growth healthy, and economic growth chugging along, we remain optimistic and anticipate a positive investment climate to persist in 2017.
How Can We Help?
At GGM, aligning your investments with the prevailing economic environment is just one of the ways we strive to add value to your portfolio. If you are concerned about whether your investments are primed for the current market and allocated to meet your objectives, we recommend our complimentary portfolio checkup. Contact us today!