By: Russ Colbert
Issue: Spring 2018 (Vol. 36, No. 1)
The current recovery started in June 2009 and has been one of the longest in U.S. history. The current recovery has had a GDP growth of around a 2.2% annual growth rate. It has been a slow recovery, but it has started to improve over the past year. We are seeing strength improving in the labor markets. Unemployment claims are the lowest since 1973. Payrolls are growing at a strong pace, especially in the civilian employment and small business employment area. We believe the overall GDP for 2018 should come in around 3.0. That could improve as the year goes forward.
We are seeing capital goods orders increasing, excluding aircraft and defense. For example large trucks are up almost 20 percent. Home building is set to grow this year in spite an increase in interest rates or limits on mortgage interest and property tax deductions.
An improving economy means higher interest rates. We expect as many as three 1/4 point rate hikes this year. Interest rates are currently very low. Housing has remained strong in the past despite rising interest rates that have occurred many times in history. The existing home and new home sales were higher in 2017 than they were in 2016 in spite of rising mortgage rates. The new tax law will make it harder for builders and home buyers in high tax states, but should have a positive effect on low tax states such as Florida, Texas, Arizona, and Nevada.
The U.S. economy is accelerating and the potential for a recession any time soon is very slim. Corporate earnings growth for this year is accelerating and looks very promising even with higher interest rates.
Corrections are inevitable and hard to predict. This is especially true when risks to the economy remain low and the stock market has many undervalued stocks. That is how we see it today .Corporate earnings look strong for this year. Even many of the political opponents of the tax cuts are saying it should lift economic growth over the next few years.
Monetary policy remains loose. The Banks are in good financial shape, and deregulation going to increase their ability to lend more and stimulate the economy.
The rise in protectionism remains a possibility, and we think better deals will be cut to keep the good parts of NAFTA in place. The tariffs recently announced do not offset the tax cut that were passed. We think there is more smoke than fire with this and have to see how far it goes. We still think we should have strong growth this year and that GDP will likely come in at 3% or better.
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Senior Portfolio Manager
Advisory services offered through Royal Palm Investment Advisors, Inc., a Registered Investment Advisor.