So far, U.S. economic policy positives seem to outweigh negatives (column)
July 22, 2018
So far this year, the return of the business cycle has brought the fiscal policy changes that were expected to propel economic activity and the financial markets higher in 2018.
Policy remains a key theme to watch. Tax cuts, a more business-friendly regulatory environment and increased government spending should support consumer spending, business investment, and corporate profits — key drivers of LPL Research's economic and stock forecasts.
The biggest risk to investor confidence this year has been around trade, including new tariffs. When comparing the fiscal measures with the potential impact of increased tariffs, however, the benefits appear to outweigh the costs. With these factors in mind, policy changes should have a positive influence on the economy and markets.
Another theme that may garner more attention this year is that certain economic and market indicators may have peaked, and that we may have seen the best out of this expansion. However, the context is critically important here. Reaching these points with a strong economic backdrop is expected and indicates the potential for continued growth; in addition, historically, we've seen an average of four more years of stock gains after triggering these market signals. So, although we are in the later stages of the economic cycle, it does not appear that a recession is looming.
Against this backdrop, LPL Research maintains the forecasts that were set forth at the beginning of 2018, following the passage of the new tax law. Expectations are for 3 percent gross domestic product growth for the U.S. economy, with tax cuts, government spending and deregulation measures providing support. As expected, accelerating economic growth and rising interest rates continue to pressure bonds; thus, flat to low-single-digit returns are projected for bonds (as measured by the Bloomberg Barclays U.S. Aggregate Bond Index). However, it's prudent to note that high-quality bonds may provide diversification benefits for investors' portfolios.
Strong earnings are expected to remain the key driver of stock gains, thanks to the benefits of the new tax law. Given that we are in the later stages of this economic cycle, with factors such as increased trade tensions and geopolitical uncertainty at play, greater market volatility may be ahead. But it's important to remember that experiencing these ups and downs is a normal aspect of our market environment. Also, within the context of steady economic growth and strong corporate profits, there is the potential for stock gains of 10 percent or more (as measured by the S&P 500 Index).
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Overall, economic and market growth is expected to continue in 2018 and beyond. Please let us know if you would like a copy of the LPL Research Midyear Outlook 2018 or contact us.
Tracy Tutag, CFP CDFA and Stuart Green CFP MBA, are Principals of Aprisent Financial Group, located in Edwards, 970-926-6911. Securities offered through LPL Financial, member FINRA/SIPC. Advisory services offered through Western Wealth Management, a registered investment advisor. Aprisent Financial Group and Western Wealth Management are separate entities from LPL Financial.