Halfway Through – Taking Stock!

Dear Friends,

As we start the second half of 2018, the U.S economy appears poised for continued growth. The tax cuts enacted at the end of 2017 and an increase in federal spending approved in February appear to be adding economic momentum. In fact, these policies are expected to add about $285 billion in fiscal stimulus to the U.S. economy this year.

Meanwhile, corporate earnings are at new highs – up over 25% from a year ago for the average large blue-chip company. This represents the seventh straight quarter of profit growth and the strongest gains in many years. These same companies are now starting to spend money on factories, equipment and other capital goods. In the first quarter of this year, these capital expenditures totaled over $167 billion – the fastest pace in seven years.

However, this continued growth does spark one area of potential economic concern. When increased spending occurs with very low unemployment, inflation starts to appear. In fact, one key inflation measure watched by the Federal Reserve hit the central bank’s target in May after running below it every month for six years. If inflation starts rising too fast, the Federal Reserve will be forced to raise rates at a much faster pace as well and this could lead to economic difficulties as borrowing money becomes more expensive.

Headlines, of course, can also throw the markets and economies off. Chief among these is the current discussion about tariffs which could have a negative effect on the earnings of large multi-national companies. We suspect that this political discussion is just a very boisterous negotiating tactic given the current administration’s pattern of behavior but a protracted trade battle would certainly have negative economic consequences.

These trade headline concerns have kept market returns somewhat muted so far this year. Your second quarter statements that you will get in the next week or two will show just slightly positive returns for the second quarter. For the year so far, overall returns are on the order of about 2-3%.

Interestingly, these returns so far appear to be following the typical pattern of Presidential mid-term election years. In the months ahead, politics will certainly dominate the headlines. In the previous 14 mid-term election years (going back to 1962), the markets have experienced a sell-off early in the year and on average end the first three quarters essentially flat. However, as the election results become clearer, the markets rally in the fourth quarter – averaging an increase of 7.5% in the last quarter.

Given the strength of current earnings and capital spending, we are optimistic that this pattern will repeat itself for 2018 and the year will end quite positive for investment results. Stay tuned! That is easier to do these days than ever before as we have dramatically expanded the platforms you can use to listen to our latest weekly broadcast. Our radio show “Dollars and Sense” provides an opportunity to hear our up-to-date thoughts and perspectives. The show is broadcast live on 102.5 FM/540 AM every Sunday at 9AM and then distributed out to various on-line platforms on Monday morning. Links to the most popular channels are below so be sure to subscribe to our channel on your favorite social media platform and you will be automatically notified of our new shows.

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If we have not yet visited with you in 2018, the summer time is a great opportunity so don’t hesitate to contact the office to schedule a conversation.