By Stephen Kyne
We’re halfway through 2017, so it’s time to take a look at how the year is progressing, and where we see the remainder of the year going, in terms of risks and opportunities in the economy.
The economy has grown at a faster-than-expected pace so far this year. First quarter GDP has been revised up, twice, and well exceeds expectations. Almost all of the S&P has reported earning for its first fiscal quarter of the year, and are trending toward a year-over-year growth of upwards of 20 percent (12 percent, not including the energy sector). These are largely due to top line revenue increases, meaning that increased profits are largely due to business growth, rather than cost cutting. We expect this trend to continue throughout the year.
Inflation is holding steady, in line with 2016 figures, at roughly 2 percent. Some inflation, perhaps counter-intuitively, is fundamentally good for the economy. When we expect goods and services to be more expensive tomorrow than they are today, we make purchases today, which means inventories need to be replenished, which puts people to work and gives them money to spend on the things they want and need. Without some inflation, the economy stagnates.
Another driver of spending this year may be interest rates. The Fed increased rates another .25 percent in June, as was expected. With the Fed finally making good on promises to increase the rates they charge banks, we’ll see that increase reflected in higher mortgage rates. The expectation of higher future rates pushes fence-sitting potential buyers into the housing market. As a result we’ve seen, and will likely continue to see, increased sales of new and previously owned homes. The same will likely be true of any purchases which are typically made on credit, including automobiles and business capital items.
An asset class that may be hurt by rising interest rates, however, would be bonds – specifically many bond funds. As newly issued bonds carry higher interest rates, the value of previously issued bonds, with relatively lower interest rates, should decrease. These changes should be reflected in the overall value of the funds that hold them.