By Dennis O'Keefe on Dec 29, 2017
Who would have thought, a year ago, we would be here today? After a divisive election gave us an outspoken, often-times crude President-Elect, many suspected his Inauguration would bring back the economic dark times we just came from.
Here we sit a year later. We’ve seen real growth in both corporate profits and GDP. Something most experts didn’t think was possible anymore.
To be fair, the economic gains we’ve seen this year have nothing to do with our President. First of all, presidents lack that sort of authority. Second, even if the few regulations that Trump rolled back could affect the economy that significantly, there is no way that it could happen so quickly.
But seeing strong growth – especially in GDP (Gross Domestic Product – the sum of all of the economic activity in the US.) is something we haven’t seen in a long long time.
Let me back up and take a minute to talk about the last two decades or so in the economy.
For the better part of the 20th century, the US economy grew at 3% or more annually. Three percent growth helped build this country into what it is today. Without it, you can’t have companies growing fast enough to provide the historical 10% returns we have come to accept as normal.
We have not had 3 quarters of 3% growth since 2005 and we’ve not seen consistent GDP growth in this century. (Source: St. Louis Fed) It is hard to create jobs and sustain stock market returns when growth is so lackluster.
Currently we are on track to see greater-than-3% growth for the first time in over a decade. I cannot express how significant that is.
We’ve seen individual quarters of growth in the last 17 or so years. But we haven’t seen consistency in that growth. It is hard for companies to move forward if they can’t count on the economy growing in the coming 3, 6 or 12 months. Uncertainty stifles hiring and investment.
Simultaneously, corporate profits continue to surprise investors. Since the crash in 2007-2009, profits of US corporations have grown at an irregular rate, mirroring the GDP growth rate. 2017 saw better profits and more consistency.
Why is this? If I had to guess, and that’s all we can ever do while in an economic cycle, we’ve finally hit that sweet-spot of employment where enough US consumers are spending sufficient cash to push the economy forward.
As employment continues to improve, we should see continued improvement in all of these number as well.
“But,” many say, “Isn’t it time for the market to crash? It’s been almost 9 years since the market bottom!”
It could be. But I have a feeling we’ve got more room to run.
Back in 2009, when asked, I said that by the end of 2017 (ie: right now), the Dow Jones Industrial Average (DJIA) should be at about 36,000. People looked at me as if I had 3 heads.
Had I predicted the DJIA to be 25,000 instead, they would have looked at me just as crazy. Remember, in early 2009, the Dow Jones was hovering around 8,500. Tripling, or even quadrupling, was out of the question. (And yes, if you haven’t looked lately, the Dow Jones Industrial Average is hovering just under 25,000!)
Yet, given the downturn, we came from, and normal 3% growth over the intervening 8 years, 36,000 was plausible.
And it still is!
Am I saying that the market is for-sure going to grow by almost 50% in the coming year or three?
Is it possible, in light of previous economic recoveries, previous market highs and lows, and such?
Am I more confident given the recent stability in GDP and corporate profits?
My Reasonable Prediction for The Economy: 2018!
Everyone wants to know, “Dennis, what do you think? How do you think we’ll do next year?”
Sometimes an unexpected event affects the markets in the short term. Brexit or last year’s election are two that come to mind. These are typically short-term in nature and isn’t something we can predict.
Excepting those types of events, the market tends to follow the economy. So the big question is: What’s in store for the economy in 2018?
There doesn’t appear to be any economic problems on the horizon. As we’ve already discussed, GDP and corporate profits point to a good 2018.
Employment is the only uncertainty. As long as the employment market doesn’t overheat – similar to how it did in the late 1990’s – we should be fine.
What makes this prediction difficult is that Employment is still sending us mixed signals. Looking at some of the figures, it appears we’re seeing a tightening of the labor markets. There are more jobs than people to fill them. Many engineering jobs are not finding qualified candidates. And the construction trades are dying for skilled workers. This typically signals the late stages of an economic cycle.
Yet the number of people under-employed (part-time workers that would prefer to work full time) is still above average at this point in the economic cycle.
Couple that with low wage growth (which could be because the sheer number of higher-paid Baby Boomers that are retiring at a record pace over the last 8 years, obscuring wage growth) and you don’t get a crystal clear picture. If the labor market is tightening, why are there so many people under-employed and why aren’t wages growing the way they did in the late 1990’s?
What’s the solution? Continue to monitor the markets and make changes if the story changes or we get clarity to the Employment picture.
For those of you who are investment management clients, you may have seen some trades in the latter part of 2017. Much of that was to take some profits as the markets have pushed forward. This will be our strategy going forward as well. If the markets continue to press forward at this pace, you should see further trades within your portfolio to take advantage of the situation.
Thank you again for your support in 2017. Donna, Anna and I are so very lucky to work with all of you. We wish you a very prosperous and healthy New Year.
Thank you for your time this week. If you have any questions or concerns, please don’t hesitate to email us at firstname.lastname@example.org or call us at (800) 453-3209. If you don’t already have a copy of my book, The Biggest Financial Mistakes Retirees Make, you can order it on Amazon or click here and we will get a copy out to you, free of charge!
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This blog is the opinion of Successful Money Strategies, Inc. and is provided for informational purposes only and is not intended to provide any investment advice or service. Statistics and other figures are accurate at the time of original publishing. Any advice herein should not be acted upon without obtaining specific advice from a licensed professional regarding the readers own situation or concerns. Always count your change.