By: Dividend Sensei
A Strong Economy Points To Potentially Great Returns Ahead
Each week in my portfolio update I track the state of the economy via six meta analysis (studies of studies). These take into account dozens of leading economic indicators as well as global bond market data to determine how the economy is doing and what the risk of a recession is over various time frames (one month to 9 months).Well despite all the uncertainties swirling around us today regarding potential trade wars, rising interest rates, and wages that are rising at a frustrating pace, the economy appears to be booming.
For example the Atlanta and New York Federal Reserves both have real time GDP trackers that estimate how fast the economy is growing in inflation adjusted terms based on various economic reports as they come in. Each is slightly different in terms of what reports they use and how they are weighted. Atlanta’s GDPNow estimates that the economy is growing at 4.8% while New York’s Nowcast projects 3.3%. Now it’s possible that both are way too optimistic but my own analysis of consumer and business spending also indicates that the economy is not just strong but getting stronger in recent months.
For example consumer spending (70% of the US economy) rose 0.5% in March (compared to February) and 0.6% more in April. That’s very fast and coincides with surveys showing that consumer (and business) confidence is at its highest levels in about 20 years. In addition the trend of both the Atlanta and New York forecasts is positive. Even if the actual numbers prove high that positive trend alone is cause for optimism. And if Q2 economic growth is between 3.3% and 4.8% (the actual figure historically falls between the two estimates) then America is poised for the best economic growth in nearly a decade.
Assuming we can avoid a growth/corporate profit destroying trade war then the fact that the stock market has been trading sideways for much of 2018 (causing valuations to fall significantly due to booming earnings) might indeed be a perfect catalyst for a big 12 month market move. That’s especially true if recent trends in slow but steadily rising wages, (but flat and low inflation) also hold and the Federal Reserve proceeds with its planned gradual pace of rate hikes this year and the next.
Or to put another way, given the facts on the ground (as best as the data can show us), stocks might indeed be ready for a great five quarter romp. Again I’m not advising anyone attempt to market time this information. But if you have been shaken by the higher volatility of 2018 so far, and frustrated by the market’s sideways trending? Well then both the economic/corporate earnings fundamentals as well as market history indicate that the worst thing you could do right now is sell. Because if this trend holds up then by the end of 2019 long-term investors will likely be far richer.