Quarterly Update

Oct. 2018

Paul Single, Managing Director, Senior Portfolio Manager | Oct. 2018

Economic Expansion Continues to Break Records

Job gains giving consumers more money to spend

Low inflation provides Fed more leeway on rates

Growth may slow as stimulus effects wear off

The current economic expansion continues to impress. Now over nine years and three months old, it is within striking distance of the record post-World War II expansion of 10 years that occurred in the 1990s. The unemployment rate has fallen from 10.0% to 3.7%, the largest such decrease of all prior expansions.

The inflation rate has averaged just 1.6%, one of the lowest of all expansions. This is important. With low price pressures, the Fed can move gradually in returning interest rates to normal levels. This measured pace reduces the risk of a policy mistake—tightening monetary policy too quickly—that has precipitated many past recessions.

Employers have been hiring at a consistent rate (see first chart) for a record 103 months, adding 19.7 million people to payrolls and well outpacing the 8.7 million jobs lost during the recession. This has generated greater household income, which has driven consumer spending, the primary propellant of economic growth.

One problem facing the economy—and to workers this is a good problem—is that there are more job openings than workers looking for a job (see second chart). This should put upward pressure on wages as employers scramble to find workers. More evidence of economic strength can be found in the “Quits Rate,” a measurement of workers who voluntarily leave their positions. It is near a record high, indicating confidence on the part of workers who are willing to leave the stability and seniority of their current jobs to pursue other positions, usually at higher pay.

Fed projections call for economic growth of 3.1% in 2018, the fastest calendar year growth rate since 2005. But following this year, the Fed expects growth to slow down as the “sugar high” of the recent federal stimulus wears off and rising interest rates start to bite into consumer spending. By 2021, GDP growth is expected to fall to 1.8%.

Key Points

Job gains giving consumers more money to spend

Low inflation provides Fed more leeway on rates

Growth may slow as stimulus effects wear off

Stay Informed.

Get our Insight delivered straight to your inbox.

Important Disclosures

The information presented does not involve the rendering of personalized investment, financial, legal, or tax advice. This presentation is not an offer to buy or sell, or a solicitation of any offer to buy or sell, any of the securities mentioned herein.

Certain statements contained herein may constitute projections, forecasts, and other forward-looking statements, which do not reflect actual results and are based primarily upon a hypothetical set of assumptions applied to certain historical financial information. Certain information has been provided by third-party sources, and, although believed to be reliable, it has not been independently verified, and its accuracy or completeness cannot be guaranteed.

Any opinions, projections, forecasts, and forward-looking statements presented herein are valid as of the date of this document and are subject to change.

There are inherent risks with equity investing. These risks include, but are not limited to, stock market, manager, or investment style. Stock markets tend to move in cycles, with periods of rising prices and periods of falling prices. Investing in international markets carries risks such as currency fluctuation, regulatory risks, and economic and political instability. Emerging markets involve heightened risks related to the same factors, as well as increased volatility, lower trading volume, and less liquidity. Emerging markets can have greater custodial and operational risks and less developed legal and accounting systems than developed markets.

Concentrating assets in the real estate sector or REITs may disproportionately subject a portfolio to the risks of that industry, including the loss of value because of adverse developments affecting the real estate industry and real property values. Investments in REITs may be subject to increased price volatility and liquidity risk; concentration risk is high.

Investments in Master Limited Partnerships (MLP) are susceptible to concentration risk, illiquidity, exposure to potential volatility, tax reporting complexity, fiscal policy, and market risk. Investors in MLPs are subject to increased tax reporting requirements. MLP investors typically receive a complicated schedule K-1 form rather than Form 1099. MLPs may not be appropriate investments for tax-advantaged accounts because of potential negative tax consequences (Unrelated Business Income Tax).

There are inherent risks with fixed-income investing. These risks may include interest rate, call, credit, market, inflation, government policy, liquidity, or junk bond. When interest rates rise, bond prices fall. This risk is heightened with investments in longer-duration fixed-income securities and during periods when prevailing interest rates are low or negative. The yields and market values of municipal securities may be more affected by changes in tax rates and policies than similar income-bearing taxable securities. Certain investors’ incomes may be subject to the Federal Alternative Minimum Tax (AMT), and taxable gains are also possible. Investments in below-investment-grade debt securities, which are usually called “high yield” or “junk bonds,” are typically in weaker financial health and such securities can be harder to value and sell, and their prices can be more volatile than more highly rated securities. While these securities generally have higher rates of interest, they also involve greater risk of default than do securities of a higher-quality rating.

Investments in emerging market bonds may be substantially more volatile, and substantially less liquid, than the bonds of governments, government agencies, and government-owned corporations located in more developed foreign markets. Emerging market bonds can have greater custodial and operational risks and less developed legal and accounting systems than developed markets.

As with any investment strategy, there is no guarantee that investment objectives will be met, and investors may lose money. Returns include the reinvestment of interest and dividends. Investing involves risk, including the loss of principal. Diversification may not protect against market loss or risk. Past performance is no guarantee of future performance.

Index Definitions

The Bloomberg Barclays US Aggregate Bond Index is a broad-based flagship benchmark that measures the investment grade, US dollar-denominated, fixed-rate taxable bond market.

The S&P/LSTA Leveraged Loan 100 Index (LL100) is a daily tradable index for the U.S. market that seeks to mirror the market-weighted performance of the largest institutional leveraged loans, as determined by criteria.

The Standard & Poor’s 500 Index (S&P 500) is a market capitalization-weighted index of 500 common stocks chosen for market size, liquidity, and industry group representation to represent U.S. equity performance.

Indices are unmanaged, and one cannot invest directly in an index. Index returns do not reflect a deduction for fees or expenses.

Put our insights to work for you.

If you have a client with more than $1 million in investable assets and want to find out about the benefits of our intelligently personalized portfolio management, speak with an investment consultant near you today.

If you’re a high-net-worth client who’s interested in adding an experienced investment manager to your financial team, learn more about working with us here.