Economic and Stock Market Commentary for the week of June 20, 2017

The long expansion is showing signs of strain. True, we aren’t facing the headwinds that limited growth to 1.2% in the first quarter. However, manufacturing, retailing, and job growth again are seeing choppiness after appearing to hit their stride earlier. Thus, the likely gain in GDP this quarter probably will be better than its opening-period counterpart, but fall short of the 3% previously expected.

Inconsistency has been a trademark of this up cycle. On point, not only have most years seen seasonal weakness in the first quarter, but subsequent periods have had ups and downs, leading to a string of underwhelming annual performances. We think this uneven pattern will continue into 2018, even if growth picks up, in the aggregate, as we suspect.

Meanwhile, the Federal Reserve sees the glass as half full, as evidenced by its widely expected decision to raise interest rates last week. That marked the third hike since December and came despite inconsistent economic growth and below-target inflation.

The central bank is taking a more hawkish stance on monetary policy. The Fed noted that inflation is now running below its 2% target, which may force it to take a more measured near-term approach to interest rate hikes, but still laid out plans to shrink the bank’s massive $4.5 trillion balance sheet, starting later this year. In brief, the bank will sell U.S. bonds it owns, probably nudging long-term rates upward. A less accommodative lead bank may, in time, test the mettle of the bulls.

With the Fed in the rearview mirror, the focus could return to tensions globally. Worldwide, strained relations with our allies and heightened terrorist alerts could affect the markets. Stateside, investigations into Russia’s election meddling will influence market trading, as will further challenging efforts to enact business-friendly legislation.

All the while, the bulls are running in place, with just occasional missteps, as the averages are trading just off record highs. In all, traders are downplaying event risks, as they focus on the economic, earnings, and monetary fundamentals, which are largely supportive.

Conclusion: Investors expect things to work out, which explains the market’s high P/Es. And while there are risks at these levels, it is hard to bet against the fundamentals. So, selective accumulation of equities is still in order.

Source: Valueline.com