America’s GDP grew by 4.1 percent in the second quarter. Naysayers on one side of the political divide proclaim strong growth can’t last. Cheerleaders on the opposite side crow, “You ain’t seen nothin’ yet!”
Even stripping out posturing leading up to the mid-term elections, financial trends are encouraging. Our economy has averaged 3.1 percent GDP growth for the last 6 months, 2.8 percent for the last year. For part of 2015 and 2016 growth dropped below 2 percent. (Data from The Wall Street Journal, 7/28/18).
We see soaring business investment in productive areas like commercial construction and new equipment. Skeptics scoff, citing one-time surges in exports running ahead of tariff threats, plus government expenditures and consumption.
Negativism aside, the Journal noted that if you remove volatile categories such as inventories and federal spending, “sales to private domestic buyers rose at an annual rate of 4.3 percent—even better than the overall GDP number.”
As financial advisors, we see another data point worthy of a salute, a solid uptick in the personal savings rate. Observers have long bemoaned the lack of savings for the future, including retirement. The fact that consumers could save more while holding up their end in GDP-revving spending is good news.
Savings is a function of earnings, including wages and one’s faith in self and the future. Data revisions showed a considerable jump in salaries and wages in the first half of 2018 compared to 2017, “about $500 billion in the pockets of Americans than previously estimated.” (WSJ)
Consider the “wealth effect.” Based on tax reform, many employers have declared bonuses, even as they expanded production and hired workers.
When investment portfolios and 401(k)’s and another retirement plans grow from added contributions and strong market performance, people are inclined to spend. They remodel the kitchen, take road trips despite higher gas prices, buy a house, take a first time or tenth time cruise. Capitalist economies grow and thrive based on confidence.
Critics complain that corporations who received tax relief are not “paying their fair share,” citing the fact that many public companies have increased dividends to shareholders. Who are shareholders? Most of you reading this, are. Even if you own stock indirectly through pension plans, mutual funds, ETFs, variable annuities and variable or indexed life insurance, you benefit from dividend distributions. For retired “income investors,” dividends are a valuable component in financial security and independence. I love crumbs! So does Mr. Market. Market values live and die on earnings outlooks.
Take a look at the yields on your reserve cash. Per Bankrate.com the average rate paid on money market accounts is a puny 49 basis points (0.49 percent). It’s easy to find FDIC-insured rates at institutions paying 1.75 percent to 2 percent or more. Yes, the Federal Reserve will keep raising interest rates which will worry Mr. Market, but you will garner better returns on savings and CDs. Yin and yang.
Taxes matter. We saw a dip in growth and increased stock market volatility in late 2017 based on tax-reform uncertainties. High net worth individuals, families, and business owners should initiate tax planning for 2018, if you haven’t done so. The year is flying by.
Are there things to worry about? Sure. Stock valuations remain high and Mr. Market always frets about what “might happen,” like a tariff war. The good news already is baked into the pie. High flying stocks, e.g., Facebook and Twitter, are quick to plummet back into the lower stratosphere based on earnings shortfalls or business hiccups.
As to tariffs, at the G7 meeting in June in Quebec, President Trump floated the idea of eliminating all tariffs and trade barriers between America and our allies, an idea initially met with derision. Well, what do you know? The same week GDP numbers came out, a tariff truce was called by the U.S. and EU midst pledges to work toward a zero tariff deal. China, whose currency is weakening with stocks down 25 percent in a severe bear market, is watching. An all-out trade war is less likely.
As noted, taxes matter. Burdensome, complex, and costly regulations matter, and right now the policy of lifting regulations and cutting taxes, matters. Opinions that the current expansion has legs are reassuring. However, market slides often happen at peaks in optimism. Maintain cash reserves and “lower risk asset buckets,” and cut debt while building reserves if need be, because financial storms happen. Prudent financial planning always is a stylistic recommendation!
Lewis Walker, CFP®, is a financial life planning strategist at Capital Insight Group; 770-441-2603. Securities and advisory services offered through The Strategic Financial Alliance, Inc. (SFA). Lewis Walker is a registered representative and investment adviser representative of SFA which otherwise is unaffiliated with Capital Insight Group. He is a Gallup Certified Strengths Coach and a Certified Exit Planning Advisor (CEPA®).