Economic and Stock Market Commentary for the week of June 21, 2018

Alex Ralicki |

The Federal Reserve is likely to continue tightening the monetary reins. To wit, the Fed raised interest rates in March and again at last week’s FOMC meeting. The latest adjustment was widely expected. It also indicated we could see two additional increases this year—most likely in September and December. The prospective fourth hike surprised the markets somewhat—although the response was muted—and reflected the bank’s revised forecasts calling for stronger growth, still lower unemployment, and modestly higher inflation. The Fed also implies that its evolving views may cause it to raise rates as many as three times in 2019, as it strives for a more normalized rate structure after a decade of unprecedented monetary easing. Meanwhile,

The economy is in a sweet spot that should keep a materially more aggressive Fed stance at bay. On that count, and in addition to the better unemployment trends, we are seeing strength in manufacturing and non-manufacturing, and notable strides on the trade front, as exports are rising, notwithstanding the escalating tensions with our key trading partners. Given such trends—along with data showing still modest increases in consumer inflation—it is logical that the Fed will sustain a fairly gradual monetary approach. Given such a supportive scenario, we could see GDP growth of 3.5%-4.0% this quarter. Nearly as solid a showing is  likely in the second half.

Still, we have concerns. But these are mostly off shore, where trade tensions with China, Canada, Mexico, and the European Union, and complex relations with North Korea and Russia are most concerning, even if there are signs of selective progress. Add in the political strains at home and there is the potential for stress down the road. Thus,

It is not surprising that the bulls and bears are locked in a tug of war with neither side giving much ground. And our sense is that this year’s back-and-forth action will continue for a while, leading to further range-bound results in a pricey market that retains most of the gains secured during the past decade.

Conclusion: We think there still are values out there, but given the elevated level of the market, investors will need to be selective.