Question: What could we expect from the economy and financial markets in the second-half of 2017? Answer: My crystal ball is a little cloudy, and making short-term predictions in this business is always dangerous. However, based on facts, trends and hard data it’s likely that the last six months of 2017 are expected to be much like the first six months, meaning good, but not too good, and that’s okay.
When an economy starts to overheat, inflation often occurs. Prices rise in response to demand outpacing supply. Prices rise, then producers overproduce, which eventually creates excess capacity. Simply stated, boom leads to bust. Sustainable and steady growth decreases the likelihood of a bust.
In high school, whenever our ski team coach noticed one of us was becoming overconfident, he’d holler “don’t get too far over your skis!” During practice he stressed fundamentals to ready us for competition and also keep us right-sized. Reaching for more than we could handle is an appropriate metaphor for investors as well; don’t forget the basics. Signs
In hindsight it’s evident that much of the pre-2008 expansion was built on fluff and overconfidence. A slightly frivolous feeling was in the air hinting that economic conditions might have been too good to be true. As a nation we were getting too far over our skis resulting in the Great Recession of 2008. Fundamentals Matter
Since then we’ve found our way back and reached many new highs. Presently our economy is growing right around 2% per year. The Federal Reserve reports inflation slightly below their 2% target. Going forward, growth will be depend on increased wages and solid corporate earnings to support higher valuations.
It appears that the economic strength experienced during the first-half of 2017 is slowing down. One reason is that it looks like it will be more difficult than expected for Washington to pass health care reform, tax reform and even legislation supporting the repatriation of overseas capital. What does this mean for the stock market? Any activity in Washington suggesting job growth improvement and business expansion could be viewed as a positive sign. Sustainable economic development will be built on jobs and real net income.
For stocks, it’s reasonable to expect sectors with strong earnings growth to do well. Financials, industrials, defense, health care, biotechnology, and technology could see near-term earnings growth. For the fixedincome or bond portion of a portfolio, depending on your tax rate, tax-free municipal bonds may provide a very attractive taxable equivalent when compared to taxable bonds. With the expectation that interest rates will stay lower for longer, eventually trending higher, investing in intermediate term bonds may be appropriate.
Overseas, it appears that select economies are gaining some traction and strengthening. The European Central Bank, the equivalent of our Fed, is hinting that they may cut back on the quantitative
“easy-money” program. Europe and its banking system still have plenty of issues though, so it’s best to remain cautiously optimistic
about global growth.
Here’s what to watch during the second half of 2017: Economy: Expect economic growth between 2 – 2.2% with lower inflation, unemployment rates and moderate wage inflation. While little progress has been made on infrastructure spending plans and the fact that tax reform will be difficult to achieve, economic fundamentals appear to remain sound. Equities: Domestic stock markets had a strong first quarter with even more positive returns in the second quarter, marking the seventh consecutive quarter of positive returns for the major indices. Sustainable growth depends on fundamentals such as earnings and real growth. International: There is a more positive tone in Europe. Continue to monitor geopolitical hot spots such as North Korea, Syria and Afghanistan. Fixed Income: Overall, yields are higher than last summer. U.S. Treasury rates are down year-to-date. Beware of the temptation to abandon appropriate asset allocations to chase higher yields, getting over those skis. Fixed-income investments are typically owned for the return of principal rather than the return on principal. Higher-coupon bonds selling at a premium are a potential way to increase cash flow instead of reaching for yield on lower quality selections. Bottom line: Don’t get too far over your skis. Remember the fundamentals and the importance of having an investment plan matched to your personal risk tolerance and goals.
Mid-year is a good time to review your plan and make decisions about any adjustments that may be needed keeping you properly invested in a way that is consistent with your personal goals and expectations. Stay focused and plan accordingly.
Past performance is not an indication of future results and there is no assurance that any of the forecasts mentioned will occur. Views expressed are the current opinion of the author and are subject to change without notice. Information contained in this report was received from sources believed to be reliable, but accuracy is not guaranteed. Information provided is general in nature, and is not a complete statement of all information necessary for making an investment decision. There is no assurance these trends will continue or that forecasts mentioned will occur. Investing always involves risk and you may incur a profit or loss. International investing involves additional risks such as currency fluctuations, differing financial accounting standards, and possible political and economic instability. These risks are greater in emerging markets.
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This article provided by Darcie Guerin, CFP®, Vice President, Investments & Branch Manager of Raymond James & Associates, Inc. Member New York Stock Exchange/SIPC, 606 Bald Eagle Drive, Suite 401, Marco Island, FL 34145. She may be reached by phone at 239-389-1041, or by email at firstname.lastname@example.org. Website: www.raymondjames.com/Darcie.