The S&P 500 fell 7.3% in October, and other indices fell even more. Is the market forecasting a downturn in the economy? Hello, my name is Paul Carroll. I'm the CEO and founder of Efficient Wealth Management. The first two quarters of the year showed above average growth. Can it last? We would expect with the tax cuts that you would get a boost in growth, and most economists feel that that's going to wash out by 2019. Normal GDP growth is the function of two things: productivity and the working age population. Typically, in a country as developed as ours, 2% is a pretty good standard for long term growth. That doubles the size of the economy every 30 years.
The legacy of the tax cuts probably more than anything will result in weaker finances with which to deal with a future downturn. There are three forward looking growth indicators to be concerned with: investment, trade, and consumption.
First, investment. Just 12% of companies spent some or all of their tax cuts on future investment. That's a little bit less than we expected, and there is trouble brewing in the housing market. The housing market is very highly correlated with future consumption.
Second, trade. Tariffs are beginning to buffer trade. Earlier in the year we saw some pre-tariff buying of raw materials and stocking up, the Fed threw growth indicators. That is now over.
Third, consumption. Consumption seems to be holding up for now. The retail sector in the United States is the largest retail sector proportion for almost any country in the world. The private sector wage gains do seem to be sticking, and we're really going to find out how well is this holding in there as we hit the Christmas season. In fact, probably by the end of the Thanksgiving holiday we'll know just how much consumption's holding up.
The risk right now is that the Fed raises interest rates too fast. It's trying to normalize interest rates so that when there is a downturn, it can drop them and react appropriately. It's in a bit of a catch 22 now. It needs to raise rates, but not so much that it is the reason we walk right into a recession. In summary, the stock markets are a fairly reliable, but not perfect, leading indicator of an economic downturn. All the signs suggest that 2019 will not be as good as 2018. We wish you the best of investing success.
“Strong Growth Data Obscure a Probable Slowdown to Come.” The Economist, The Economist Newspaper, 1 Nov. 2018, www.economist.com/finance-and-economics/2018/11/03/strong-growth-data-obscure-a-probable-slowdown-to-come.