Global Market Commentary

The U.S. Economy

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The U.S. Economy:  Good Performance On Many Fronts

U.S. employment data from the Labor department corroborates the evidence that non-farm payrolls rose for the 86th straight month in November, with 228,000 new jobs created.  Because of the steady hiring, the unemployment rate has been at 4.1% for two months, holding at a 17-year low.

What has become of all this talk about the U.S. economy being stuck for the long term at a growth rate of 1 to 1.5% per year?

As recently as a year ago, several well-known economists were making that claim.  These economists should be embarrassed by their gross “misunderestimation” of the growth rate.  The growth rate was indeed in the1.5–2% range for much of the last few years — this was the shockingly slow recovery from the financial crisis of 2008.  Many were wondering if the economy would revert to an even slower growth rate over the long term — hence the unwise projections.

Clearly the pessimists were wrong.  Even the optimists underestimated the current positive environment.

Here are the positives we see.

1. U.S. GDP growth is currently above 3%, which could rise to a 4% rate next year if the tax bill passes and incentivizes capital spending on plant and equipment as it is projected to do.

2. Consumer confidence in very strong in the U.S.

3. The rest of the global economy is also trending upward with most major economies and many emerging economies experiencing strong economic growth and low to moderate inflation.

4. Inflation is low to moderate in most countries.

5. The U.S. stock market is very healthy.

Our U.S. Economic View for 2018

We anticipate that the growth rate in 2018 will be the strongest in over 10 years.  Core inflation remains somewhat muted, coming in at about 2.0%; wage growth is at 2.5%.

We anticipate that the low unemployment rate will lead to accelerating wage growth in coming months.

U.S. stocks have experienced a rolling correction, with sector by sector declines while the market as a whole rises.  This is positive, and although corrections can happen at any time, we are bullish on U.S. and some foreign stocks for the next few months at least and possibly much longer.

In our view, several risks remain — as long as these are avoided the market will move ahead.

The risks are:

1. A big rise in interest rates.

2. A big rise in inflation.  At 2% inflation is moderate rising wages and rising energy prices can impact it and cause interest rates to rise and compete with stock yields.

3. An inverted yield curve between 2- and 10-year bonds.  In other, words if short-term interest rates exceed 10-year interest rates, it is a signal to start heading for the exits.  Currently 10-year rates are about 0.6% above 2-year rates.

4. A war that draws the U.S. in due to a threat to the U.S. (The primary risk we see is Korea.)

Investment implications:  Economic data continue to support a bullish view of the U.S. stock market.  Investors should not let themselves be distracted by political turmoil, temporary corrections, or sector rotations, and stay strategically long.  Corrections remain buying opportunities, until risks begin to materialize: sharp rises in interest rates or inflation; an inverted yield curve; or a war.