Economic and Stock Market Commentary for the week of June 28, 2018

Alex Ralicki |

The first half is ending on a high note, with strong progress being made in reducing the unemployment rate, in narrowing the trade imbalance (with the deficit declining sharply in March and April), and in boosting retail spending (with sales coming in well above consensus forecasts during May). Add in generally tame consumer inflation data (which is allowing the Federal Reserve to stay on a gradual monetary tightening course), and we could see the nation’s gross domestic product climb by more than 3.5% in the now-ending three months.

The economy should continue to grow in the second half, as this broad improvement displays considerable momentum. Business investment and inventory building should continue to be strong. True, higher oil prices may slow consumer spending somewhat, while the consequent higher prices resulting from our increasingly contentious trade standoff with Mexico, Canada, Europe, and China may also weigh on economic growth. Our sense, therefore, is that GDP growth may average closer to 3% in the second half.

Meanwhile, there is reason to be cautiously optimistic about 2019. As noted, the economy is performing very well. Moreover, with high levels of business and consumer sentiment likely to remain in place, this strength should persist into next year, with our model suggesting growth could average close to 3%.

But there are reasons for some caution, as well. The trade situation is of increasing concern. More, the slightly hawkish Federal Reserve—which is suggesting it may raise interest rates twice again this year ahead of a trio of possible hikes in 2019, if the economic and inflation data warrant—could start to dampen sentiment by late next year. If this occurs, we’re likely to see a deceleration in economic growth in 2020.

Investors are still buying in spurts, even as they remain skittish, seemingly preferring to believe the economy’s underlying strength will be sufficient to withstand the offshore headwinds and a slightly more restrictive Fed.

Conclusion: It may be a delicate balancing act for investors going forward, suggesting that any future market gains will be hard won.