Economic and Stock Market Commentary for the week of December 12, 2017
The economy’s forward momentum remains in place as we approach yearend, with worker productivity (the highest in three years), trends in retailing (including vehicle sales, which were helped by Black Friday deals and strong consumer confidence), and activity in major industrial categories (particularly manufacturing) all pointing to further moderate gross domestic product improvement as we close out December. Add in record-high stock prices, additional increases in personal income and personal consumption expenditures, and still-rising home prices, and businesses and consumers would seem sufficiently motivated to keep GDP growth in the range of 3%, or better, for the full quarter.
This time, unlike some past years, there should be sustainability as we turn the calendar. As noted, the key consumer and industrial markets were doing well as we moved into the home stretch of 2017. Indeed, there is more inclusiveness to the business advance now than at almost any time in this long, but understated, expansion. Thus, weather permitting—and that is often an issue early in the year—GDP improvement is likely to level off somewhat in the first quarter before resuming a more spirited climb in the spring. In all, we look for growth to average close to 3% during the coming 12 months.
Some of our cautious optimism reflects the expected turn of events on Capitol Hill, where recent approvals of the Re-publican-crafted tax reform proposals, by both the House and the Senate, may lead to a final bill being presented to the President for his signature later this month or early in 2018. Such proposed revisions, if adopted, could give the economy an early nudge forward in 2018—assuming that the Federal Reserve stays wedded to a steady and careful monetary approach and key budget issues are resolved on a long-term basis.
So, for now, there is little to deter the bulls, who continue to set records on the Dow Jones Industrial Average, the S&P 500, and the NASDAQ. What makes this resilient bull market so impressive is that these gains are coming on top of more than eight years of strongly rising equity prices.
Conclusion: The stock market remains strong; the factors propelling the bulls forward are still in place; and this momentum, once established, is hard to break. Thus, the case for equities is still compelling. But the continuing strength also is sustaining the need for care in equity selection.