During the first half of 2017 we have enjoyed strong equity markets for both the US and the world’s top 20 economies.
The U.S. economy is still the largest and most important in the world, and investors have enjoyed the best of both worlds, with stocks and bonds rallying together amid record-low volatility.
The U.S. equity markets received a strong push from several areas of the economy, as follows:
- The labor market ended another quarter with healthy gains.
- We experienced robust new payroll numbers.
- Inflation is moving along at a normal pace.
- There is a buoyed consumer sentiment.
- The housing market is growing stronger.
- There has been increased consumer spending over the last quarter.
While economic growth remains dynamic at this stage of the business cycle, continued political maneuvering, or lack of, in Washington creates doubts about the government’s ability to boost the economy to higher levels. Following the collapse of the healthcare bill in the Senate in July, GOP leaders, after their August break, will be facing an uphill battle in passing the 2018 budget through the House, a prerequisite for pushing ahead with the government’s tax reform agenda.
Large U.S. corporations also play a major role on the global stage.
- More than a fifth of companies on the Fortune Global 500 come from the U.S.
- The U.S. markets and global markets have benefited as the global economy is having one of its best years in more than half a decade.
- The world’s top twenty economies are growing so far this year, at a depth of growth we haven’t seen since 2010.
- There is growth in emerging market economies as they export more.
In conclusion, the question of how much longer the combination of outsized gains and ultra-low volatility can continue is paramount. When mean reversion will take place, as it usually does is impossible to know, but worth thinking about possible risks as we finish the second half of 2017.
One possible risk is that the Fed will increase rates at a higher pace than anticipated by investors. Another is the Fed’s desire to start unwinding their huge balance sheet in the near future. Either one, or both, of these scenarios could precipitate an increase in interest rates which normally causes pressure on the equity markets.
Lastly, it remains to be seen if Washington is able to deliver the goods to help spur on the economy. Stay Tuned!
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