October 3, 2017

After an annualized rate of increase of 1.2% in the first quarter of 2017 and 3.1% in the second quarter, we believe real GDP (Gross Domestic Product) will increase 2-2.5% in the second half of the year.  Hurricanes Harvey and Irma will undoubtedly have some impact on second half trends due to the damage and disruption of business, but business in the affected areas should recover as damage is repaired and disrupted services activity resumes.  While housing and automobile sales have stalled, consumer spending and business investment will continue to contribute to second half growth.  Inventories are expected to significantly add to growth, particularly in this year’s third calendar quarter, and net exports may show some strength due to improved global economic trends and a lower exchange value for the U.S. dollar.  For the year as a whole, real GDP growth should average somewhat above 2%.

While fiscal stimulus measures coming out of Congress could temporarily boost economic growth, we still 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.


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 by buyers of stock.  With both the stock and bond markets highly valued and a significant drawdown in share prices long overdue, we are sensitive to any developments that could cause the market to correct. The S&P 500 median price-to-earnings ratio is currently 23.1x and is higher than 96% of historical periods.  The 10-year U.S. Treasury is also highly valued and offers only a 2.3% yield to maturity.   For now, 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 continue to keep 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.