Date: October 28, 2016
QUARTER IN BRIEF
The economy seemed to hit a soft patch this summer, but stocks carried forward with the S&P 500 advancing for the fourth straight quarter in Q3, rising 3.31%. In spite of two major banking scandals, multiple terror attacks and an especially contentious presidential race, markets were noticeably calm for much of the quarter. For the year, the markets have produced decent returns in spite of these distractions. The Federal Reserve emerged from its September meeting with strong signals for a rate hike before the end of the year.
DOMESTIC ECONOMIC HEALTH
Among the economic indicators, gains in unemployment are doing the best. The unemployment rate has remained consistent at or below 5%. Consumer confidence also improved throughout the quarter as measured by both the Conference Board and University of Michigan’s measure of household sentiment. This is important because consumer spending is the main driver of growth in gross domestic product (GDP). Other factors supporting this positive sentiment are low mortgage rates, low gas prices, and a slight improvement in wages.
On the less positive side, core consumer prices moved up by 2.3% year-over-year as of August and growth in GDP is projected to finish 2016 at 1.8% which was originally projected to be 2.0%. Also, the price of stocks on the S&P 500 relative to company earnings is near record highs. While unemployment has declined, non-farm employment has not demonstrated any appreciable growth. New home sales continued growth in the quarter as measured by applications for building permits, however, existing home sales slowed because of limited inventories and upward price pressure giving rise to affordability issues.
GLOBAL ECONOMIC HEALTH
The economic indexes for established and emerging equity markets and for international bonds all recorded strong performance for the quarter. This occurred in spite of the news about Deutsche Bank’s instability in relation to the US and European Union standards for sound banking practices. Most of the Eurozone demonstrated positive growth with Germany and France leading with stable to moderately positive growth. Italy and Spain have experienced declines in their main equity indexes over the past four quarters and Japan is continuing to struggle with their economy and recently acknowledged that the negative interest rate policy has failed in stimulating economic improvement.
The US is experiencing the second longest bull market that has lasted for 90 months with growth of 222%. Consumer and government spending is strong which makes a recession less likely in the near term. Sustaining this market run is becoming more difficult and is challenging US companies to maintain growth in earnings to support high stock valuations.
As you have heard many times in the speeches leading up to the November election, job growth is high on the priority list. The major challenge will be how to transition the workforce to an economy that depends less and less on labor input. For example, the retail industry continues to be rocked by the huge migration to online buying and away from the shopping malls and traditional retail outlets. Bottom line, a much higher level of merchandise is moved with a greatly reduced level of human input. This phenomenon has acted to reduce the number of available jobs and creates higher training and skill levels in order to be employable.
Other ideas common to both parties is increased spending on infrastructure and defense, which spells increased government borrowing and a worsened deficit relative to GDP. While there may be good justification for spending on these priorities, there is no denying that an increased deficit will act to lessen the options available to the government and Federal Reserve when the next economic slowdown is encountered.