The economy is undeniably strong; the recent GDP report showed economic growth of 4.1% in the second quarter, the fastest pace in nearly four years. President Trump called the growth “amazing” and “very sustainable.” Many economists are not convinced, however, and warn that this won’t last.
Meanwhile, Fed Chairman Jerome Powell said that strong growth is one reason the central bank should keep raising interest rates. With inflation moderate, the Fed is expected to stay on the pace of a quarter-percentage point rate hike every three months.
While the economy is looking strong, during the next half of 2018, there will be two big events we will be keeping a close eye on:
Midterm elections
Midterm elections have a history of low voter turnout. In fact, midterm election voter participation has been declining since 1966; they simply do not have the pull that a presidential election does.
While unemployment is typically the #1 issue that pushes voters to the polls, the jobless rate in June was 4% and economists expect the low U.S. unemployment rate to go even lower over the next year, reaching levels not seen in fifty years.
That being said, President Trump's tariffs can have economic consequences that may play into political ones, too. Kevin Madden, a Republican political consultant, said, “There is significant risk that the benefits of tax reform and the overall good feelings about the economy could all be negated by the actions on tariffs.”
The bottom line is this: as the November midterm elections grow closer, expect to see a lot of market volatility and turmoil.
Trade tension
Speaking of tariffs, there is a distinct possibility that global trade tensions could slow the economy. Though recently tensions were dialed down as the United States and the EU stepped back from the brink of an escalating trade war, as financial advisors, we worry that the more the trade tensions roil the global markets and stay in the headlines, the more it will have a negative impact on business and consumer confidence.
One option investors can consider during these times of trade tension is small-cap stocks. Small-cap stocks are more focused on the domestic U.S. economy, while large-cap stocks tend to be more internationally exposed. Large-cap stocks could bounce back when trade tensions fade, but for now, we expect trade tensions will stick around for a while.
As we continue to navigate through the second half of the year, remember that diversification is key. Be sure to cover all asset classes to include equities, fixed income, real assets and alternative assets.
Alternative assets may be particularly important now. These are assets that are either “nonstock or bond” assets, like venture capital, private equity, hedge funds, real estate investment trusts (REITs) and real assets such as precious metals, rare coins, wine, and art. Or, assets that have a low or negative correlation to stocks and bonds.
Lastly, investors should always keep their own “family index” in mind. The family index is what the investor needs to earn to have a successful future. Now is not the time to take undue risk to keep up with un-needed returns.
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