ECONOMIC AND STOCK MARKET COMMENTARY

It is all coming together on the economic front, following an underwhelming 2016. True, the economy did strengthen in the second half of last year. But much of that pickup stemmed from a surge in exports in the third quarter, which was to be reversed in the final period. Now, the upturn is more uniform and likely sustainable. To wit, recent weeks have brought gains in manufacturing, non-manufacturing, personal income, and factory orders. All of this should help lift the gross domestic product by more than 2% in the fast-ending quarter.

We think the good times will last for a while. That should not imply that it will be clear sailing ahead. It rarely is this late in a business up cycle. Still, there probably is enough momentum in place on the business and consumer fronts for growth to press irregularly higher over the next several quarters. Thereafter, a possible reduction in taxes and suggested gains in infrastructure spending may produce sufficient strength for GDP growth to approach 3% in 2018.

The Federal Reserve is clearly taking note, as recent comments from Fed officials—including Chair Janet Yellen—suggest the Fed will assume a tighter monetary stance in the months ahead, with perhaps as many as three interest rate hikes being implemented this year. Further increases are likely in 2018, when, presumably, growth and inflation will be higher. Note: The Fed was scheduled to meet and possibly approve a rate hike after we went to press.

Meanwhile, the brighter economic outlook augurs well for corporate profits. Overall, the recent reporting season was stronger than expected, with nearly two-thirds of all companies beating forecasts. Prospects for the coming quarters also are upbeat. In sum, we think earnings are headed higher for the next couple of years. Still,

The bulls’ grip on the equity market was weakening a bit as we went to press. Indeed, after a succession of all-time highs had been made by the indexes in a rush of optimism fueled by rising earnings and talk of tax cuts, concerns about higher interest rates and questions about how fully the President’s myriad plans will be adopted are leading to some selling.

Conclusion: Even with this nascent pullback, P/E ratios remain high, as do the risks in this pricey market.

Source: Valueline.com