2017 Economic Forecast: Will We Have Growth or “Slowth”?Submitted by Orange CA Financial Advisor | Sterling Wealth Partners on February 26th, 2017
For the first couple of months of 2017, the market’s “Trump Rally” continues and it seems as if all major market indexes reach new highs on virtually a daily basis. What is somewhat surprising is that we have continued robust market growth, but without the volatility that usually comes along with a growth spurt of this magnitude. Indicators for a continuation of the Trump rally are mixed and history would tend to suggest that we are due for a market correction or pullback sometime soon as the current bull market stretches into an 8th year.
The “Trump Rally”
Since the election of President Trump, all major market indexes are up substantially. Much of this is based on the speculation of President Trump making good on his election promises which included regulatory reform, tax reform and major fiscal stimulus in the form of infrastructure spending and a focus on growing the US economy. Areas of the market that benefit most from the President’s programs include financial services and banking, energy and industrial production and these sectors have led the market rally. The Trump rally is truly based on speculation and not any actual improvements, so any gains from future fiscal stimulus programs may already be baked into stock valuations. Should the President hit any roadblocks getting his programs through Congress, the Trump rally could stall . We would suggest a cautious approach to investing in the market now, particularly in the sectors that have benefitted the most from the Trump rally.
For the last several years, the US economy has been mired in a new phenomenon called “slowth.” Slowth is a combination of low inflation and low growth, and it has been very difficult for the economy to break out of this condition. For the past 8 years, the US economy has grown at an annual rate of only 1.6% which is well below the historical average of 4-5% for a typical economic recovery. During the late 1970’s we had the phenomenon of “stagflation” which was high inflation and stagnant growth, but slowth is different and requires different tools. One of the primary tools used in the past to spur growth after a recession was to lower interest rates by 2%-4%. However, interest rates are currently near historic lows and this approach isn’t feasible. In fact, the Federal reserve is likely to raise rates by .75% to 1% over the remainder of the year to make this tool available in the event we fall into another recession.
So, while inflation is expected to remain low (around 1.7% to 2%) for the foreseeable future, the hopes are that increased growth can break us out of the Slowth cycle. For 2016, US GDP grew at 1.9% which was a slight improvement over prior years. President Trump expects his programs to get US GDP growth back into the 3% or more range in the near term. While his fiscal stimulus approach could grow the economy, the hurdle is getting anything done in Congress. Republicans feel we have a spending problem, which the President’s plan would certainly make worse and Democrats feel we have a revenue problem which will not be solved by the President’s proposed tax decreases. So, the bottom line is that the President may face resistance from both parties for different reasons. Should nothing get accomplished in Congress, the prospects for the end of the Trump rally and continued Slowth would be significant.
While the prospects of breaking out of the Slowth pattern seem favorable, the actions of Congress and the President will ultimately decide whether we finally break out of an 8-year pattern of little growth in the economy. If growth can finally be achieved, the Trump rally could conceivably continue for the foreseeable future. However, history, time and politics seem to indicate a rough time for 2017.
At Sterling Wealth Partners, we are taking a cautious stance on the market given the political uncertainty and the historic length of the current bull market. If you would like an independent, objective analysis of your portfolio please contact us.