To Our Valued Clients,
In review of the third quarter of 2018, the US economy continues to maintain strong momentum as nonfarm employment growth and consumer spending suggest real GDP growth will continue at a solid pace. Strong job growth, higher asset prices and a relatively solid savings rate should continue to support consumer spending. Corporate profit growth has been very strong in 2018, with operating earnings per share of S&P 500 companies increasing 27% from 2017. Additionally, solid GDP growth has helped top-line revenue for many US companies. Company profit margins have also risen, reflecting only a modest uptick in inflation and interest rates, combined with a massive cut in corporate tax rates.
Acceleration in the US economy has been partially offset by a deceleration in some of the world’s other advanced and developing economies. Generally, the global economy remains in good shape entering the fourth quarter of 2018, although this year has posed more challenges than last as Europe, Japan, Canada and China have been growing at a slower pace relative to 2017. Monetary policy remains accommodative in many international economies which has continued to support growth, although many economists foresee a tighter policy shift over the next year in an effort to normalize. Emerging market economies have faced significant headwinds thus far in 2018, most notably Argentina and Turkey have seen sharp declines in currencies and confidence. Emerging markets have been hampered by country-specific factors, political uncertainty, worsening trade tensions and tighter global financial conditions (higher US interest rates and a stronger US dollar).
Under the current economic backdrop, the Federal Reserve is likely to continue to hike interest rates at a steady pace, bringing the federal funds rate to their “long term equilibrium” range of between 2.75% and 3.00% at some point in 2019. This is a conscious effort by the Fed to normalize rates and financial conditions, not necessarily due to inflation fears but rather the idea that easy monetary policy historically fuels asset bubbles. US fixed income markets have been calm over the past several months despite increasing economic and political uncertainty around the globe. The US yield curve has been flattening, which has historically been considered a sign that the economy is late in the growth cycle. However, since US economic growth remains solid, broad-based, and sustainable, combined with low inflationary pressures and transparent, data-dependent Fed leadership, economists see little evidence of an impending recession.
The Trump administration recently reached a new trade deal with Mexico and Canada which has certainly eased trade tensions with our neighbors to the north and south. Unfortunately, the trade conflict with China is showing few signs of abating. Tariffs have the potential to disrupt domestic and international supply chains, increase price pressures and dent confidence. This is something we continue to monitor closely.
This past September marked the 10th anniversary of the start of the global financial crisis which caused the biggest global recession since the Great Depression. While the global economy and financial markets have fully recovered, its memory has caused a long-term shift in how investors view risk. As a result of the crisis, 8.8 million jobs were lost in the US, unemployment spiked to 10%, 8 million homes were foreclosed on, $19.2 trillion in household wealth evaporated, home prices declined 40% on average and the S&P 500 declined 38.5% in 2008. The aftermath of the financial crisis produced a plethora of new legislation and the creation of new oversight agencies and committees. Ten years later, the painful lessons from the financial crisis are still present in our lives each day and we are dedicated to staying diligent and prudent in our decision-making, having a diversified approach to investment management and acting as a fiduciary for our clients.
As we head into the final quarter of 2018, we wish you and your families a happy and prosperous holiday season. We thank you for your ongoing trust and confidence, and hope we can continue to help you discover The Next Piece – to Your Peace of Mind. ™
Josh Williford, MSF
Director, Empowered Investor
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