ECONOMIC AND STOCK MARKET COMMENTARY

What a difference a year makes. For example, 12 months ago, the economy was under pressure from softening oil and commodity markets and consequent declines in business capital investment. Now, as the first quarter winds down, we see manufacturing, non-manufacturing, employment, and consumer spending all holding up well. Add in a roaring stock market (with a resultant rise in household wealth) and a further escalation in real estate values, and it is reasonable to expect gross domestic product growth to modestly surpass 2% in the current quarter--or some three times the paltry sum tallied a year ago, even with a possible further drawdown in inventories and a likely deceleration in auto demand.

Now, the challenge will be to keep the momentum going. And here the odds favor the economic bulls, as the projected slowdown in vehicle sales should be more than offset by developing gains in business investment and further resilience in consumer spending and housing demand. The net result likely will be growth that approaches 2.5% in the second quarter and moves past that modest level in the concluding half. The prospective benefits of promised tax cuts and rising outlays on the infrastructure front should then help push growth to as much as 3% in 2018. However, that probably will be the peak level of the business cycle.

Questions linger, meanwhile, as Congress will need to vote on the President’s tax and spending initiatives; tariff and border-adjustment policies are yet to be formulated; and the Federal Reserve’s monetary tightening timetable is a work in progress. Thus, our longer-term projections are somewhat tentative.

Another earnings season has come and gone, and this latest one has been sufficiently supportive, overall, to help the bulls retain the upper hand on Wall Street. As we go to press, in fact, the leading equity averages, for the different capitalization categories, are still making all-time highs.

Conclusion: As the good news persists and stocks move higher, so, too, do valuation measures. Indeed, price-earnings ratios are at the point where the equity market is looking increasingly frothy and thus vulnerable to disappointments on the fiscal or monetary fronts.

Source: Valueline.com