Q3 2018: Key Economic and Market Insights

Advance Capital Management’s president and chief investment officer, Christopher Kostiz, provides his key economic and market insights from the most recent quarter.

Although the United States economy and foreign economies around the world are experiencing a somewhat synchronized and multidimensional pickup in growth, there are ample signs of potential change in the wind for investors. With central banks tightening their belts, global trade tensions and an aging U.S. expansion, there exists the potential for higher interest rates, higher market volatility and additional economic uncertainty around the world.

U.S. Economy Grows at Fastest Pace Since 2014

In the second quarter, the U.S. economy grew 4.2%, which is the fastest pace in four years. Passage of the Tax Cuts and Jobs Act of 2017 has put more cash in companies’ coffers and ramped up business spending at the fastest pace in years.

For instance, capital expenditures, such as spending on factories, equipment and other capital goods, totaled about $167 billion in the first quarter for S&P 500 companies. That is the fastest pace in seven years and a record for a first quarter. Add in a solid job market, rising corporate profits and healthy industrial production, all signs point to the U.S. economy growing throughout this year and into next.

Global Trade Tensions Create Uncertainty

As the domestic economy produces solid growth numbers, global trade tensions between the U.S. and its major trade partners have festered and could potentially derail this sanguine economic environment.

The U.S. has reached agreements with Mexico and Canada to revamp the North American Free Trade Agreement (NAFTA). In late July, the U.S. and European Union also agreed to work toward lower tariffs and trade barriers, and the Europeans agreed to buy billions of dollars’ worth of soybeans and natural gas.

Yet an agreement with China, one of our largest trade partners, is still elusive and complicated. In short, the president has threatened to impose tariffs on virtually all $505 billion that the U.S. imports from China. These threatened and imposed tariffs are viewed as punishment for China’s policies that have resulted in intellectual property theft or mandated technology transfers on U.S. companies doing business there. So far, China has responded in kind to our tariffs, mostly in the agricultural sector. It is still unclear what the long-term outcome will be of this trade war. A quick resolution should benefit domestic growth and employment, while a prolong and severe trade war will serve to hurt U.S. farmers, families and businesses.

Central Banks Change Course

Several central banks around the world have started the arduous process of reversing their decade-long accommodative monetary policy agendas. The Federal Reserve began raising interest rates in 2015 and then began selling assets in 2017. The benchmark interest rate has moved from about 0.25 percent to 2.0 percent over the past three years. Further, the European Central Bank and Bank of Japan are reining in asset purchases, although neither has begun raising rates or reducing balance sheet assets. The Bank of England, meanwhile, hiked interest rates for the first time in a decade last November.

The accommodative monetary policies of the last decade have provided significant tailwind for asset prices. Now that those policies are tightening, the global economy is in uncharted territory. How much of a headwind will financial markets face in this new environment? The answer to this question will likely influence markets for years to come.

Bonds Expected to Fall, Stocks to Continue Modest Gains

Looking ahead to the remainder of this year and into 2019, the economy appears poised for modest growth, sustained employment gains and an increase in corporate activity and earnings. However, amidst these positives are expected higher interest rates by the Federal Reserve and elevated trade tensions between our trading partners, which could disrupt world economies if not contained.

As these events play out, we expect capital markets to respond accordingly. Core fixed-income securities will likely suffer as interest rates continue to trend higher. Domestic equities should produce solid, albeit more modest, gains moving forward, while we expect many of the international markets to bounce back from their slump of the past six months.

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Disclosures: Investments are not insured, and may lose money. Client should be prepared to bear the risks associated with investing.

Past performance is no guarantee of future results. This commentary contains the current opinions of the author as of the date above, which are subject to change at any time. This commentary has been distributed for informational purposes only and is not a recommendation or offer of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but is not guaranteed.