Winter Economic Update

Economic Recovery Slows

The fourth quarter release of GDP growth came up short with a 1.9% increase. The previous quarter increase of 3.5% brought us hope that maybe we turned the corner on the economy, but unfortunately, the uneven recovery persists. While this is disappointing, there were signs of encouragement in the report. Personal consumption, which is a good indicator of the consumer’s support of the economy, remained strong. Also, residential investment and business investment show continued growth.

These positives along with continued improvement in the labor market and very strong Institute of Supply Management releases are signs of encouragement. The ISM figures are non-government releases and are considered a broad gauge of the economy’s strength. Both the manufacturing component and the broader non-manufacturing component (approximately 2/3’s of our GDP) have shown the most consistent indication that we have a reasonably healthy economy.

While we are concerned that our GDP isn’t showing growth, most other indicators alleviate most concerns about impending economic weakness. Another bright spot has been earnings growth after far too many quarters of declining earnings growth we have not only seen two quarters of increases, most reports have indicated optimism in the future. Finally, the Euro-zone is also showing signs of more consistent growth, which will only add to our growth.

Political Uncertainty

The new President and the proposed policies are wildcards. While there are few specifics at the moment, the assumption is that these are pro-growth. So the market has been showing its optimism. Keep in mind that these are only proposals. But a Republican Congress will likely implement many of them. As with all things, we won’t really know the effect until after implementation, so time will tell.

Proceed with Caution

Based on both political and economic events, along with a lack of any major geopolitical issues in the world. This leaves us optimistic, but cautious. The optimism is based on all of the good news mentioned above. But a stock market that is at historic highs and elevated valuations point to caution.

With this economic backdrop, we need to ask ourselves where do we go from here. The stock market is at record highs, optimism is up, but stock prices relative to earnings levels are historically elevated. The hope is that earnings catch up to price. Earnings are showing early signs of promise, but a pullback is always a possibility. As an investor, we always need to look for value, but in today’s market, this remains difficult.

The best thing is to meet with your advisor and make sure your portfolio matches your goals. You may be properly allocated, but without a thorough review, you just don’t know. Remember that you are in this for the long haul and that investing requires patience. Sensational headlines often cloud our thinking (click HERE for more on "forecasts"), but a solid plan with periodic reviews can help you focus on controllable decisions.