Benjamin Franklin famously said that “in this world nothing can be said to be certain, except death and taxes” in a letter regarding the potential permanency of the new US constitution. This seems completely applicable today given our current election process and the rhetoric from both parties.
On Friday October 28, 2016 the Bureau of Labor Statistics announced preliminary Gross Domestic Product (GDP) for the 3rd quarter of 2016 at 2.9%, up from 1.4% in the 2nd quarter. GDP growth continues to be slow, but steady (see chart below). The US is now into its 7th year of economic expansion, currently the 4th longest expansion in history. Since 1858 there have been 33 expansionary periods. From 1850 until 1900, the average expansion lasted only 2.3 years. From 1900 until 1950 that gap increased but only to 2.6 years on average. However, from 1950 – 2000, the growth period increased to 4.3 years on average, and three of the longer expansions have occurred since 1970 (1983-2000:7 years; 1992-2000: 8 years; 2002-2009:7 years) (source: Advisors Capital Management) While it is extremely difficult to forecast much beyond a year, I do not see anything to suggest a recession in the near future.
So what does a slow, but steady economic growth with a low interest rate environment mean for your investments.
On the fixed income (bond) side I expect interest rates (basis US 10 year Treasury) to slowly increase from the current ~1.83% to the 2.5% area by the end of next year. I expect the Federal Reserve to raise short-term interest rates by 0.25% in December 2016 and perhaps two one-quarter percent increases in 2017. This should put downward pressure on bond prices (as interest rates rise, bond prices fall and vice versa) but not to a significant extent. The difficulty is that while bonds are generally safer investments, the current low interest rates are not sufficient to meet most investor’s needs.
On the equity (stocks) side I expect a shift from an interest rate driven market to an earnings-driven market. I expect corporate earnings to begin to improve going forward. Initial indications of 3rd quarter 2016 earnings are better than forecast, with 73% of the S&P 500 companies who have reported (290 out of 500) through 10/28/16 beating their earnings estimates, with 10% matching, and 18% missing. By industry, consumer staples (think paper towels), technology, and financials beating significantly, while real estate, telecom services, and materials coming in only around 50% better. Some industries benefit from rising interest rates (i.e. financials) while others are hurt (i.e. utilities). Overall, a gradually rising interest rate environment is generally a positive for equities as it is a sign of a solid economy. The key will be how the FED manages the process of normalizing monetary policy (raising rates). Too big or too fast likely pushes economy into recession. Too small or too slow potentially causes deflation.
Historically, November starts the best 3 month period for the equity markets. However, I expect this year’s election to create increased volatility. While the headlines will focus on who wins the White House, I am more concerned about the outcome of Congress. I will let you know what action, if any, I am taking after the results are in.
Special thanks: the best compliment I can receive is a referral from a client or colleague.
I want to extend a special thanks to clients & colleagues who have recently referred me to family and friends:
Ewa Z. Kevin W. Lou M.
Nancy D. Richard L.
November Calendar of Events (comments and additions for future months are always welcome)
- November is National Family Caregivers Month. Please consider reaching out to a family member or friend who is caring for a loved one. Why not offer to give them a day off.
November 1st Healthcare open enrollment – for coverage starting Jan 1, 2017 – runs through 12/15/16.
Note: Medicare open enrollment started 10/15/16 and end 12/7/16
November 8th Election Day
November 11th Veterans Day – says thanks a Vet
November 17th Great American Smokeout – encourage a smoker to quit
November 24th Thanksgiving – have a wonderful holiday
I hope you find this report useful. Please share it with anyone who you feel would benefit from the information.
Sources: Advisors Capital Management, RiverFront Investment Group, Raymond James & Associates