Contributed by: Jaclyn Jackson
As the current bull market for U.S. stocks nears its eighth anniversary, is there potential room to grow or could we be heading for the next recession? In the face of slow growth, low interest rates, and low inflation how could "Trumped-Up" economics and an increasingly hawkish Federal Reserve, affect the economy and the markets going forward?
On February 21st, 2017, Vanguard Investment Strategy Group Education Specialist, Maria Quinn, and Center for Financial Planning Director of Investments, Angela Palacios, CFP®, teamed up to tackle these pressing questions with a market and economics insights webinar. While Maria discussed market themes and outlooks, Angela focused on policy changes and their potential impact on investments.
Here is a recap of key points from the “Economic & Investment Update” webinar (as well as a link to the webinar replay).
Global growth should stabilize, not stagnate. Risks to the global growth outlook is more balanced this year as U. S. and European policy adds to increasingly sound economic fundamentals that should, in part, offset weakness in the United Kingdom and Japan. Aided by labor productivity rebound, Vanguard believes U.S. growth could be 2.5% in 2017. Vanguard’s long term 2% U.S. growth trend is influenced by lower population growth and the exclusion of consumer-debt-fueled boost to growth evident between 1980 and the Global Financial Crisis.
Deflationary forces are cyclically moderating. Central banks (globally) will struggle to meet 2% inflation targets. U.S. core inflation may modestly overshoot 2% this year, prompting the Fed to raise rates. U.S. wage growth has increased slightly and may continue to rise with productivity gains. Euro-area inflation will move towards target, but will like stay below it. There is deflation in Asia and monetary easing is not having the desired effect on nominal wage growth.
Cautiously optimistic outlook indicates modest portfolio returns underscoring the value of investment discipline, realistic expectations, and low-cost strategies. Keep in mind, diversification doesn’t work every time, but it can work over time.
Corporate tax and trade reform could have mixed implications. The U.S. has one of the highest corporate tax rates among developed countries. A lower corporate tax policy may curve current incentives for U.S. businesses to operate in other countries or take on too much debt. Lowering the corporate tax rate could benefit U.S. stock price performance or potentially increase the amount of dividends paid back to investors. On the other hand, it could increase inflation which may cause higher interest rates and strengthen the dollar.
With respect to trade reform, a tariff, value added tax, or border added tax on imports could increase the cost of goods and build inflation in the U.S. Additionally, other countries may retaliate with tariffs on U.S. products, triggering trade wars. Another thought is that U.S. goods could become more expensive at home and in other countries creating a scenario where U.S. goods have higher prices and with lower demand.
Tips for strategic action when markets are up include: planning for upcoming cash needs; rebalancing portfolios; making charitable contributions; and maintaining plan discipline.
If you missed the webinar, please check out the replay below. As always, if you have questions about topics discussed, please give us a call!
Jaclyn Jackson is a Portfolio Administrator and Financial Associate at Center for Financial Planning, Inc.®
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There is no guarantee that any statements, opinions or forecasts provided herein will prove to be correct. An investor who purchases an investment product which attempts to mimic the performance of an index will incur expenses that would reduce returns. Standard & Poor’s 500 (S&P 500): Measures changes in stock market conditions based on the average performance of 500 widely held common stocks. Represents approximately 68% of the investable U.S. equity market. US Bonds represented by Barclay’s US Aggregate Bond Index a market-weighted index of US bonds. The Bloomberg Commodity Index (BCOM) is a broadly diversified commodity price index distributed by Bloomberg Indexes. The BCOM tracks prices of futures contracts on physical commodities on the commodity markets. The BofA Merrill Lynch U.S. T-Bill 0-3 Month Index tracks the performance of the U.S. dollar denominated U.S. Treasury Bills publicly issued in the U.S. domestic market with a remaining term to final maturity of less than 3 months. The MSCI EAFE (Europe, Australasia, and Far East) is a free float adjusted market capitalization index that is designed to measure developed market equity performance, excluding the United States & Canada. The EAFE consists of the country indices of 21 developed nations. The MSCI Emerging Markets is designed to measure equity market performance in 25 emerging market indices. The index's three largest industries are materials, energy, and banks. Dow Jones Equity All REIT TR Index measures the total return performance of the equity subcategory of the Real Estate Investment Trust (REIT) industry as calculated by Dow Jones. The Russell 2000 Index measures the performance of the 2,000 smallest companies in the Russell 3000 Index, which represent approximately 8% of the total market capitalization of the Russell 3000 Index. Barclays US Corporate High Yield Index represents the universe of fixed rate, non-investment grade debt. The corporate sectors included in the index are Industrial, Utility, and Finance. The Barclays Capital US Aggregate Corporate Index (BAA) is an unmanaged index composed of all publicly issued, fixed interest rate, nonconvertible, investment grade corporate debt rated BAA with at least 1 year to maturity. TR—Total Return, includes performance of both capital gains as well as dividends reinvested. NR—Net Return indicates that this series approximates the minimum possible dividend reinvestment. The information contained in this presentation does not purport to be a complete description of the securities, markets, or developments referred to in this material. This material is being provided for information purposes only and is not a complete description, nor is it a recommendation. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Any opinions are those of Angela Palacios and Maria Quinn and not necessarily those of Raymond James. Investments mentioned may not be suitable for all investors. Investing involves risk and you may incur a profit or loss regardless of strategy selected. Every investor's situation is unique and you should consider your investment goals, risk tolerance and time horizon before making any investment. Prior to making an investment decision, please consult with your financial advisor about your individual situation. Keep in mind that individuals cannot invest directly in any index, and index performance does not include transaction costs or other fees, which will affect actual investment performance. Individual investor's results will vary. Past performance does not guarantee future results. There is an inverse relationship between interest rate movements and bond prices. Generally, when interest rates rise, bond prices fall and when interest rates fall, bond prices generally rise. Raymond James is not affiliated with and does not endorse the opinions or services of Maria Quinn.
