By: Russ Colbert
Summer 2019 (Vol. 37, No. 2)
We have now past the ten year mark of the longest economic expansion in history. Because it is the longest, doesn’t mean it is the best. So far, some of our past expansions of the 1960s, 1980s, and 1990s, have had stronger growth. Regarding the current expansion, we have had a number of things slow down this growth.
The current expansion over the past ten years has happened in spite of more regulation, tax hikes, and aging Baby Boomer headwinds. We have had fairly decent growth over this period of time. Consider all the negative stories investors and analysts have had to deal with during this time. Some were predicting double dip recessions that never happened, fears of mass foreclosures, defaults on municipal bond debt across the country, commercial real estate crash, continuous China economic slow-downs, Brexit, and so on. The bombardment was enough to send you headed for financial cover. What should have been the headlines over this time was the news about entrepreneurs over coming political obstacles to keep the U.S. economy growing. Don’t expect the financial media to give it much air time. They seem to be mostly interested in negative news whether it is real or fiction. The one thing we can count on over the next twelve months leading up to the elections are stories of never ending doom. We think investors who resist those stories will prosper.
Over the past few years the direction of policy has finally shifted to pro-growth, with cuts in personal and corporate tax rates, full expensing for plant and equipment, and deregulation. The U.S. economy took off with growth accelerating in 2017 and 2018 and on track for another good year of 3.0% growth. Tax rates have been cut, regulatory policy is still headed for more roll backs to stimulate growth in the economy, and interest rates are low. We have concerns with the international trade disputes with China, but are still optimistic that deals will eventually be struck. Government spending is still a problem, but not enough, at least for now, to tank the economy.
As far as some of our trading partners go, we have to understand how far we can go with some of their demands. China is a communist country, and in our opinion communism has never worked at creating wealth in the long run. China grew very fast for decades by importing foreign technologies, exporting to the West, and lately stealing intellectual property from abroad. These shortcuts have now run their course. China is currently our third largest trading partner, recently falling behind Mexico and Canada.
If anyone thinks the U.S. monetary policy can solve China’s problems, they are dreaming. Given the size of China’s economy, is the US contagion a concern? We do not think so. The last time the second largest economy in the world collapsed (Japan in 1990), the U.S. boomed? How about Europe? Do you think the Federal Reserve can fix slow economic growth caused by the socialist policies across the ocean? The high taxes, regulations, and spending cannot be fixed by the ECB’s negative rates, so I am not sure the Fed can help very much.
We currently believe the U.S. economy will continue to be strong where it matters and the GDP growth will come in around 3% or above for the rest of the year. Don’t let the negative headlines spoil your day, the trend remains strong in the areas that matter most, and prospects are bright for the U.S. economy.
If you have any questions or need a free portfolio review to keep you on track with your investments or retirement plan, please call me.
Senior Portfolio Manager
Advisory services offered through Royal Palm Investment Advisors, Inc., a Registered Investment Advisor.