The U.S. Economy - - From Here to Infinity?

Home Blog The U.S. Economy - - From Here to Infinity?

It is always interesting to look back on our economic and market outlook from a year ago and reflect on what transpired. Did we have an accurate outlook and more importantly, did our strategy benefit our clients?

Twelve months ago we believed there was no recession on the horizon and the economy would continue to grow, and at a faster pace than in prior years. This did prove true during 2017. Depending on final fourth quarter GDP, which is currently running above a 3% annual growth rate, this year will have realized three consecutive quarters of annualized growth above 3% which should lead to a growth rate of around 2.7% for the year. This is an improvement over the average annual growth rate during this economic cycle of approximately 2.2%.

Regulatory reform, tax reform and infrastructure spending were anticipated during 2017. There has been regulatory reform, reversing regulations approved under the prior administration as well as a decrease in the number of new regulations (see chart below). Although it is difficult to measure the direct economic impact from these changes, there is an underlying belief that businesses’ net profits have benefited. Tax reform has been approved and will be implemented in 2018, leading to positive economic growth for next year. Infrastructure spending did not materialize in 2017 but is being discussed as an important initiative for 2018.

Number of New Regulations Per Year

Despite our belief that inflation and intermediate- to long-term interest rates would rise slightly during the year, it did not occur. Interestingly enough, inflation remains subdued and the ten year treasury is currently near levels seen on December 31, 2016. Short-term rates did increase this year, with the Federal Reserve increasing the overnight borrowing rate three times in an attempt to normalize rates and remove the unprecedented accommodation to combat the economic challenges of the Great Recession.

While we anticipated stocks would outperform bonds, we did not envision the level of returns achieved by portfolios this year. The markets responded to stronger earnings and global economic growth, as well as overall optimism regarding tax reform. It truly has been a spectacular year for equity investors.

Looking forward, we believe the current economic expansion will easily become the second longest since 1900. It only needs to continue another four months to surpass the expansion of the February, 1961 to December, 1969 time period. The longest economic expansion is 120 months, which occurred during the 1990s, and with each passing month the probability of breaking this record continues to rise.

Why do we believe this expansion will continue? Below are several reasons we are optimistic about economic growth going forward:

1) Global economies are on a simultaneous growth pattern for the first time since 2011 and momentum continues to build. Accommodative monetary policies remain in place in many areas of the world, providing continued stimulus for economic growth.

2) Consumer confidence is strong, supported by a job market near full employment. Housing and retail sales have proven to be resilient. 

3) Business confidence continues to improve, businesses have increased capital expenditures contributing to GDP growth, and corporate profits and balance sheets remain strong.

4) The recently passed Tax Cuts and Jobs Act may stimulate growth in 2018, leading to stronger capital spending, earnings growth, wage increases, and potential job creation.

While there are risks to the direction of economic growth, including conflict with North Korea, political dysfunction in Washington and inflationary pressures from the stimulus of tax reform, we do not foresee any of these challenges having a dramatic impact on our economic outlook for 2018.

Strong equity market returns for 2017 were greater than anticipated and we want to caution that we do not believe we will see returns of this magnitude in 2018. We do believe equity prices can continue to increase, with an emphasis on international and emerging markets as they are still in the early stages of the economic growth cycle. On the interest rate front, the Federal Reserve will continue to remove some of their accommodation policies by shrinking the balance sheet as well as raising overnight borrowing rates in 2018. Yields on intermediate- and long-term bond maturities may increase slightly during the year but are more dependent on global interest rates, which have remained extremely low.

We continue to believe there is more value in equities than bonds and are maintaining our overweight position in our portfolios with an emphasis on international and emerging market equities. While volatility and a market correction have been almost nonexistent during 2017, we do believe 2018 will see increased volatility and will provide additional opportunities, albeit at a slower pace.

We thank you for your business and your confidence in Alpine Trust & Investment Group. We wish you and your families a prosperous and joyous 2018!


Elizabeth S. Pierson, CFA Senior Vice President & Elizabeth Pierson
Chief Investment Officer with Alpine Trust & Investment Group  




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Alpine Trust & Investment Group does not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.