July 5, 2017

After another weak start to the year that showed real   GDP (Gross Domestic Product) increasing at a 1.4% annualized rate in the first quarter, the economy did rebound in the second quarter and probably increased about 3%.  A pickup in consumer spending and a jump in inventories led the way to better economic growth.  In the second half of the year, we will have entered the ninth year of economic expansion and it is likely the economy will continue to advance at about a 2% rate, similar to the growth achieved over this entire economic cycle.  While economic growth should be supported in the second half of the year by continued gains in consumer spending, business investment may be restrained due to the uncertainty of tax reform.  Also, after several years of robust new car sales, automobile sales and production levels are likely to downshift in the period ahead.

While fiscal stimulus measures coming out of Congress could temporarily boost economic growth, we doubt that economic growth will be much above 2% on any sustained basis for the remainder of this cycle.  By the middle of 2019, the current economic cycle will have matched in duration the longest period of expansion in the post-war period  which was the ten year expansion from 1991-2001.  We believe that with sound fiscal and monetary policies over the next two years there is an opportunity for this cycle to set a record for duration even though the pace of growth of 2% has been well below the typical post-war average of 3%.  We also have to acknowledge, given its duration, the probability of the cycle ending.  We will of course be closely monitoring fundamental developments as we approach these economic milestones.

STOCK MARKET OUTLOOK

While valuation and investor sentiment data continue to be red flags for the stock market, volatility continues to be contained and any significant market weakness is quickly met with buyers of stocks.  A low risk of recession, improving corporate profits, a better global economy, very accommodative policies by Central Banks throughout the developed world, a gradual and predictable increase in interest rates by our Federal Reserve and the likelihood of fiscal stimulus coming out of Congress are all supportive of the market and have kept it elevated.

Our Clients’ holdings are benefiting from improving global economic growth due to their strong brands and entrenched global presence.  In addition, they operate from financial strength and are better able to cope with what is likely to be higher interest expense as the Federal Reserve gradually raises interest rates.  Importantly, our Clients’ holdings are reasonably valued on our work and, with their favorable attributes of global diversification and financial strength, are well positioned to provide attractive investment returns relative to the market in the period ahead and over the long term.