Creating a forecast for the upcoming year is fun – we have a blank canvas on which to operate; there are no incremental benchmarks to measure against to see if your forecast is in line with reality. The more difficult part of forecasting is the moment of truth when we lay down our forecast from a year ago versus the reality of what has transpired.
A quick refresher, we opine on a variety of statistics and economic events, along with various side prognostications on sporting events; but, we focus on only three economic indicators in our annual forecast. The three indicators are: U.S. Gross Domestic Product (GDP), interest rates, specifically the U.S. Treasury 10-year yield and the stock market, using the S&P 500 as our gauge.
Let’s get to the meat of it – last year we offered the following forecast:
U.S. GDP: 2.5% - assuming a 3.0%fourth quarter GDP number, we should finish the year around 2.6%.
U.S. Treasury 10-year yield: 3.0% - finished the year at 2.41%.
S&P 500 stock market index: 2.388 – finished the year at 2.673.61.
We will let you judge us of our sins in this forecasting business. A brief comment from us will suffice in this area. We felt GDP would get stronger as the year progressed and that played out. We have forecasted interest rates to move higher for a number of years – that is also a hint of our forecast for the year ahead – and yet rates have stubbornly clung to very low levels. Finally, while the stock market ran higher than we forecast, we did keep ourselves fully invested in the stock, or equity allocation of our portfolios.
Now, to the fun part.
We are anticipating that U.S. GDP growth will finish the 2018 year at a 3.2% increase over 2017. The U.S. last had a year in which GDP growth was three percent or higher in 2005 when the GDP growth rate was 3.3%. It has been over a decade since we last experienced a three percent growth rate in the U.S. GDP – so, a long over due welcome to the three percent growth rate!
Momentum and confidence in the economy are growing, and while the great recession of 2008 is still a living memory in the banks of both businesses and people’s minds, there is an increasing willingness to move forward without the fear of the economic boogey man lurking ever near. In addition, from an economic perspective, the rest of the world is feeling stronger and more confident about their opportunities. While we are not sure how beneficial the recently passed tax law will be long term for the economy, we do believe it will provide some lift to the economy on a near term basis.
Interest Rate Forecast
We see interest rates as measured by the U.S Treasury 10-year Note reaching a level of 3.0 -3.2% over the course of the 2018 year. If you stay with something long enough you are bound to finally get your moment in the sun. Here are some of the factors that give us confidence in our outlook for interest rates:
Improving economic strength
Two – three increases by the Federal Reserve Board in 2018
High employment rate – pressure on wages to move higher
New tax law – short term boost to economic growth
Impact of Federal Reserve’s actions to further the unwinding of their debt portfolio
Stock Market Forecast:
We think stocks can move another 10% higher. The tricky part of this forecast is the timing of the additional move higher for stocks and can the market hold its gains. If interest rates and economic growth follow the course we have outlined, we anticipate stocks moving higher for the first part of the year. However, if we do indeed get the lift in interest rates we see coming, we think stocks will have some indigestion to work through, somewhere in the 10% area. We don’t anticipate any kind of correction to last longer than two – three months.
We have been heavier in mid, small and international stocks relative to U.S. based large company stocks. We will keep our weightings in our stock portfolios as they are for now – we think the small and mid- sized companies will do some catch up this year relative to their large company brethren based on pricing power easing back into the picture and where we are in the economic cycle.
Things to Wonder About:
The Political Environment in the U.S. – As difficult as it has been to pass legislation with a Republican sweep of the White House, Senate and Congress, it looks to get even more cantankerous as we head into the mid-year elections. Government shutdowns are never looked upon fondly by the markets and we may once again venture into that realm.
Terrorism – The U.S. has been relatively unscathed by the horrors of terrorism for quite some time. While we hope that all nations could be free of violence, we fear that such activity may become more brazen and closer to home.
Goldilocks - We get the perfect mix of economic growth, pricing flexibility and low interest rates to create yet another strong move up in the stock market.
We are grateful to work with you. May you and your family enjoy good health, success in your individual and business endeavors and the comfort of peace in your lives throughout the coming year._