December 2016 – Monthly Outlook – State of the Economy

The US elections had a lot to do with the state of the economy, so let’s take a look at where we are and where the new Republican administration may take us.

Right now the US economy is in fairly good shape.

  1. Unemployment is at its lowest level since 2007 – The Labor Department reported on Friday 12/2/16 that the U.S. economy added 178,000 jobs in November and the unemployment rate fell sharply to 4.6%. November was the 74th consecutive month America added jobs.
  1. Home prices are back at all-time highs –  The median home price in the U.S. was $231,000 last month, according to a report from ATTOM Data Solutions (formerly RealtyTrac). That’s 9% higher than a year ago and 1% above the previous record of $228,000 hit in July 2005. (median = half of home are priced higher and half are priced lower)
  1. Services industries, the majority of our economy, have grown for 82 straight months.  The Institute for Supply Management on 12/5/16 reported its services index reached 57.2 in November, up from 54.8 in October.  Anything above 50 signals growth.
  1. The overall US economy grew 3.2% in the third quarter, according to new estimates published by the Commerce Department. It’s even better than the initial estimate of 2.9%.

Could the economy be doing better?  Are there people who aren’t benefiting in the current economy? The answer is yes to both questions.

So what can the new administration due to make things better?  They are presenting a pro-growth agenda centered around lower taxes, reduced regulations, and increased infrastructure spending.  It is an optimistic and aggressive agenda that, if it comes to fruition, could add between 1% and 1.5% to GDP (gross domestic product).

What could prevent this from happening?  First, given the current state of the economy (see above), the economy has less potential for growth than in the past.  When the Democrats won the 2008 election, the economy was in dire straits, so the natural direction was a return to growth. Second, two keys factors to drive growth are more people entering the workforce and workers being more productive.  Right now, the US has an aging population so our workforce is naturally declining.  Additionally, the administration’s stance on immigration could actually take people out of the workforce.  On the productivity front, the administration hopes to get businesses to invest more in their workers, factories, and technology by reducing taxes and regulations.  Business investment has been one of the biggest missing pieces in the current economy. Third, the lower taxes/higher spending agenda likely causes inflation and therefore interest rates to rise. If interest rates rise gradually, it should not be a drag on growth.  However, if inflation and/or interest rates where to spike up quickly, this could put the brakes on the economy.

As for the impact a Republican administration may have on your investments, we have already seen a major shift between sectors/industries.  Leading up to the election, stable dividend paying industries like telecom, real estate, and utilities were doing well, while growth industries like technology, industrials, and materials were lagging.  Virtually overnight those industries reversed positions. Also, fixed income (bonds) had been doing well throughout 2016 despite the low interest rates.  Again, almost overnight, interest rates jumped (from 1.83% on 11/7/2016 to 2.39% on 12/2/2016 on the US 10yr Treasury) which has hurt the value of fixed income investments.  I am in the process of adjusting asset allocations accordingly.

My outlook – I expect the financial markets to continue to adjust to the new Republican agenda but the general trend remains positive.  I am cautiously optimistic about the next 12 -18 months, after which I am anticipating rising interest rates may have a dampening effect on the economy and therefore financial assets.

12-5-2016_monthly_outlook_chart

 

December Calendar of Events   (comments and additions for future months are always welcome)

  • December is Universal Human Rights Day.  Let’s pray that all people, regardless of race, religion, gender, or nationality  can learn to treat others as we all wish to be treated.

 

December 10th            Human Rights Day   –  I have cherished the ideal  of a democratic and free society… it is an ideal for which I am prepared to die. – Nelson Mandela,

December 15th            Healthcare open enrollment – for coverage starting Jan 1, 2016 – ENDS!   

December 19th            Christian’s birthday

December 21st                  Winter Solstice    –       The shortest day of the year and the start of winter

December 24th            Happy Hanukkah  –    May it also be a festival of love, happiness, success, and health in your world now and always.

December 25th            Merry Christmas – have a wonderful holiday.  Let’s all remember the true significance of this day – the birth of Christ. 

 

I hope you find this information useful.   Feel free to share this information with family, friends and colleagues.

 

Sources: Fidelity, CNBC.com

 

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