We are closely watching national and international trends that may finally lead to the end of our nine- year bull market in the US. There is broad concern among economists and fund managers about many trends to watch. In this article, we share a summary of these concerns and are becoming increasingly defensive with our portfolios, especially for those clients who are over 65 and/or withdrawing from their accounts.
Diane A Ouellette, CFP®, MBA
- Full employment will likely portend inflation as wages increase and the tight labor market is unsustainable over the long term. This will drive up wage and price inflation and slow growth as companies are unable to find workers.
- We’re near the end of a nine-year economic expansion which will likely lead to a growth slowdown and possible recession by early 2020.
- Interest rates will likely rise again in December 2018 and possibly four more times in 2019 to stabilize growth and employment.
- We have a huge and growing budget deficit in an expanding economy, due to the corporate tax cuts, spelling concern for what will happen when the economy softens
- Student and auto debt have soared, and there are more people on the margins than in 2008. The federal government owns most of the student debt.
- The current administration has gutted consumer protections and weakened the Consumer Finance Protection Bureau, which helped weed out bad actors. Thus, there has been a deterioration in the quality of loans again.
- Car lenders are again providing loans to borrowers with weak credit scores and extending loans to seven years.
- The GDP numbers in 2018 so far are not showing the administration’s promised surge in business investments or the “trickle down” effect. 62% of Americans do not earn enough to be considered part of the middle class.
- Total debt among non-financial US companies is at a record high, relative to the size of the US economy.
- Economic growth in the Eurozone, the United Kingdom, Japan and many emerging markets is slowing.
- The dollar is also strengthening, which makes products sold overseas more expensive, hurting companies that do a lot of business outside the US.
- The markets have experienced much volatility this year, including a 10% correction in January and 7% drop in October. However, the markets are still quite high by historical standards such as Price/Earnings ratios.
- Growth will likely slow in 2019, probably in the range of 2.5 to 3%.
- Trade relations with China continue to deteriorate as tariff wars continue and could trigger a recession in China, with its slowing growth and increasing debt. Tariffs will also boost US inflation, reduce disposable income and force the Fed to continue hiking interest rates.
- There seems to be a lack of a coherent approach to trade policy, and companies are delaying investments amid the uncertainty.
- The three entitlement programs – Social Security, Medicare and Medicaid will rise from 10.5% to 15% of GDP, further exacerbating the debt problem.
- The US is becoming protectionist and embracing nationalism, thereby losing its influence globally and causing much anxiety with multinational companies.
- Many corporations borrowing money have leverage and debt-service metrics that put them at risk of dropping to below investment grade and possibly defaulting.
- The “yield curve” is narrowing. This gap is the difference between 2-year and 10-year Treasury rates, short-term and long-term interest rates. This often signals a recession.
Diane A Ouellette, CFP®, MBA