Tahoe Market Pulse: Disconnects that are hard to explain
January 5, 2017
Starting the day after the election, the market surged on optimism about growth and profits. Interest rates jumped, too, and most every commentator on financial networks assumed they will continue to do so. But is that all justified?
The Federal Reserve doesn't think so. Say what you will about them, the economists at the Fed are not Pollyannas for whom the glass is always half full. Far from it.
They see GDP growth of 2.1 percent next year, 2.0 in 2018 and 1.9 percent in 2019. What? Are there to be no benefits from tax cuts and spending increases? As they see it we are in for more of the sub-par growth we've seen for a decade.
One shouldn't take these people too seriously. After all, they've been wrong year after year, and not in small ways due merely to rounding errors. They missed by a mile, grossly overestimating GDP strength and the number of rate boosts the following year.
A year ago, Janet Yellen said she expected three or four rate boosts in 2016. There was only one. Now she expects three boosts next year. Triggered by the tepid growth her economists expect? Don't count on it. Economists polled by CNBC now expect two increases next year and slightly faster growth (2.5 percent).
Even Wall Street has mixed views on the prospect for growth and interest rates. Utilities and telecoms (AT&T and Verizon) fell in late summer and early fall when the yield on the 10-year Treasury spiked to 2.65 percent.
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Since then, however, telecoms have rallied back toward their highs and the total return from utilities in 2016 beat the S&P 500. That doesn't square with the consensus that rates will steadily rise for a few years.
Nor does performance by industrial stocks correlate with the expectation that GDP growth will accelerate, as investors foresee but the Fed clearly doesn't. Those are disconnects that I can't explain other than to note that it's always easier to be negative (just say no) than positive (build a case).
Actions by the Trump administration and congress remain to be determined, so putting a finer point on future economic data and interest rates is futile. What will corporate and individual tax rates be?
Which regulations will be scrapped and how soon? How fast will additional spending kick in? Trade policies? All unknown, so it's difficult to make sweeping statements about the economy and interest rates and foolish of investors to take what they hear as gospel.
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 advisor before purchasing any security.
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