More than 8 years after the Great Recession, the US economy continues to expand. Unemployment fell to a near-decade low, the US Leading Economic Index is at a 10-year peak, US equity markets reached record-high levels, and consumer confidence has surged to a level not seen in 16 years. Much of investors’ exuberance has been attributed to the Trump Administration’s proposed economic policies, yet the economy has been picking up steam since mid-summer. Expansions don’t die of old age, as Yellen famously noted, and we expect the post-crisis recovery to continue through 2017.
The market and the Fed are uncharacteristically in alignment with expectations for two more rate hikes in 2017. Barring significant deterioration in inflation, labor market indicators, risk assets, or geopolitical events, we agree with this forecast. As the Fed continues to push up the front end of the yield curve, ultra-low international interest rates should support demand for longer-term US Treasuries and dollar strength, keeping inflation and interest rates in check.
We believe the biggest risks to the economy and the markets center on event risk related to the new administration, geopolitical issues (Syria, Russia, North Korea, ISIS, and populism), and elevated asset valuations. Republicans’ failure to pass a revised healthcare bill led to the S&P 500’s largest decline in five months—an example of how future policy disappointments may affect markets. Despite the elevated political uncertainty, we believe that many risk assets are priced to perfection. Although we aren’t forecasting a recession or significant slowdown, we would not be surprised to see a pullback in risk assets. We would view a retreat in risk prices as a buying opportunity as opposed to a prelude to sharply lower asset prices.
In January, we laid out a case for “a little more growth, a little more inflation, and a little more Fed.” Overall, the majority of economic indicators remain consistent with a slow-growth economy trending in the range of 2.00%‒2.25%. We believe the factors underlying this base-case scenario are still in place.
The views expressed herein are presented for informational purposes only and are not intended as a recommendation to invest in any particular asset class or security or as a promise of future performance. The information, opinions, and views contained herein are current only as of the date hereof and are subject to change at any time without prior notice.