Tahoe Market Pulse: My outlook on interest rates
Last week’s stellar employment report points toward a strengthening economy. The Fed agrees so they are on pace to raise rates a few times this year.
To most, it’s a foregone conclusion that rates will rise more than a little. That may be true for short-term rates, but not so fast for long-term rates.
Some on Wall Street agree that long-term rates will be stable. Utilities, which are said to move inversely to interest rates, are up about five percent this year and are close to their all-time high. Preferred stocks and most bond funds have yearly gains, too.
If investors aren’t fearing much higher rates, does that mean economic growth won’t accelerate as many expect?
That is the key uncertainty. GDP growth has historically averaged 3 percent, but it has been less than 2 percent for more than a decade (1.6 percent last year). If words alone could boost it back to 3 percent (never mind 4), we’d be there today.
But growth primarily depends on two elements — productivity and labor. The former has averaged 2 percent growth annually in the past, but recently it’s been less than 1 percent.
New technologies (robots, the cloud, etc.) could boost it as smart phones and other innovations did the past decade and before them computers, transportation systems and much more.
Still, as we have become more a service economy and less an industrial one, productivity gains are harder to realize and not even so easy to measure. More efficient new plants and equipment will help productivity growth.
That’s where tax cuts and incentives come in. Bring them on. Labor is easier to measure. As the population ages, more and more Americans retire and automation replaces others, hours worked and the number of people in the full-time workforce will face downward pressures.
Given the above, while GDP growth can accelerate and I expect it will, going from less than 2 percent to 3 or more is a stretch.
Okay, but growing at even 2.5 percent would bring tangible results. Just what impact tax cuts and tax reform will have is impossible to say until details emerge if even then, other than that it must be positive for GDP growth.
This month’s surge in consumer confidence to a 15-year high shows that people on the street expect better days ahead. So do investors.
David Vomund is an Incline Village-based fee-only money manager. Information is found at http://www.VomundInvestments.com or by calling 775-832-8555. Clients hold the positions mentioned in this article. Past performance does not guarantee future results. Consult your financial adviser before purchasing any security.