Jul
18

Economic Update

Through the first half of 2017, the economy has remained strong with record-low volatility. Economic growth was slow in the first quarter though; real GDP increased at a 1.2% annual rate. Second-half growth is expected to be stronger and based on market indicators the risk of a near-term recession is low.

From People’s United Wealth Management Quarterly Review:

Bond yields had declined through mid-June. The yield on the 10-year Treasury started the year at 2.44% and was 2.15% on June 15th. Meanwhile, large-cap U.S. stocks returned nearly 10%, the broad-market U.S. stock index was up over 9.0%, and investment-grade bonds returned nearly 3.0%. International stocks returned over 13.0%.

Inflation expectations have come down as inflation measures have fallen below the Federal Reserve’s 2% target. Lower inflation expectations are good for stock prices as they support how much investors are willing to pay today for a dollar of future earnings. That multiple, currently at 17.7, is in line with historical earnings multiples at current inflation levels. With oil prices hovering between $45 and $50 per barrel, by August energy prices will be lower than last year and will be pushing the consumer price index down rather than up.

The outlook for bonds is a challenging one. With rates as low as they are and with the Federal Reserve about to reduce how much it reinvests in the bond market, rates are likely to rise as bond prices decline in the face of a growing supply.

International

From Fidelity's Quarterly Market Update: The global economy continues to expand in a synchronized fashion, with most developed economies in more mature (mid-to-late) stages of the business cycle. Relatively steady economic growth has been underpinned by a turnaround in export-oriented sectors and manufacturing activity. Nearly 90% of countries are reporting higher new export orders, and global trade growth has risen to its highest level since 2011.

China’s reacceleration supported these trends, although late in 2016 policymakers began to rein in policy stimulus. China’s economy remains broadly steady, but signs of slowing momentum in industrial activity and housing suggest most of the upside has already occurred.

Elsewhere, the Eurozone is on a mid-cycle upswing, with consumer and industrial-sector confidence at multiyear highs and rebounding core inflation. The U.S. economy remains a mix of late-cycle dynamics. Manufacturing activity has reaccelerated over the past year amid strengthening global demand, but rising wages are crimping profit margins and banks have tightened their lending standards for potentially overextended segments of the economy such as commercial real estate and autos. Inflation may be range-bound as moderating shelter costs and lower oil prices act as headwinds, but tighter labor markets and a possible rise in food prices present upside pressures,

Sources: People’s United Wealth Management Quarterly Review

Fidelity Quarterly Market Update: Q3 2017 Key Takeaways

Toby Carmody

Marketing 

All articles