The featured speaker at Bedel Financial’s annual Financial Forum was Liz Ann Sonders, senior vice president and chief investment strategist at Charles Schwab. In a fireside chat with Elaine, Liz Ann touched on a number of issues regarding the economy and the market. If you weren’t able to attend, here are the highlights.
Observations on the U.S. economy
While many moving parts make up our complex U.S. economy, according to Liz Ann, the overall picture is currently good. Unemployment levels are low. Inflationary pressure on wages isn’t an issue, although that may be starting to change. And capital expenditures to expand output have picked up. Liz Ann noted that capital expenditure spending could be an important story in 2018.
Currently, we’re “enjoying” the most sluggish economic expansion in our history, but even that has a silver lining. We haven’t seen the types of economic excesses that signal the Federal Reserve to tap the brakes on the economy. To paraphrase a quote Liz Ann used regarding bull markets: Economic expansions do not die of old age–they are murdered. In most cases, their demise is the direct result of the Fed’s response to economic excess.
Overview of the global economy
For the first time in a decade, the economies of all the Organization for Economic Cooperation and Development (OECD) members are growing simultaneously. This is a rare occurrence. As with the U.S., their growth is not terribly strong in most cases. However, the global economy is moving in the right direction.
Mixed reviews for debt levels
This was Liz Ann’s “good news/bad news” talking point. The good news comes from the consumer side. After years of casual spending, the 2007-2008 recession forced consumers to reduce their debt levels. In aggregate, consumer debt numbers now look very healthy.
The bad news is on the government side. Liz Ann noted that “nothing else matters” unless the U.S. reforms entitlements–admittedly, a painful process. Any impact from tax reform or changes to discretionary spending pales in comparison to the ever-increasing burden of entitlements. While Liz Ann doesn’t see signs of an immediate crisis, without serious changes it’s a question of “when” and not “if” the issue reaches a climax. That timing, however, is uncertain. As we saw with Puerto Rico, debt levels don’t matter–until they do!
Goals for tax reform
Liz Ann believes the goals for tax reform should be simplification and lower rates on a broader base. Of course, that’s easier said than done. Lower rates by themselves are not overly helpful for the country as a whole. Tax cuts with a sunset provision (i.e., tax cuts that have to be renewed to remain in effect) are “pointless” in Liz Ann’s view.
Reflections on our bull market
According to Liz Ann, the underpinnings of the current bull market remain in place. On the supply side, the number of publicly traded stocks is down. The Wilshire 5000 Index currently has approximately 3,800 stocks rather than the 5,000 its name implies. On the demand side, the massive amount of liquidity pumped into the system by global central banks has to go somewhere. With interest rates so low, much of it has found its way to the stock market.
Strong corporate earnings have contributed to the upward momentum. The first two quarters of 2017 saw double-digit earnings growth. The third quarter may see a bit of a slowdown, thanks to the devastation caused by high hurricane activity, but should, nonetheless, remain solid.
Government gridlock, high valuations, terrorism, North Korea, cyber-terrorism–all these issues, and more, could potentially hurt the market. Most have been around for a while. At some point the market may decide to pay attention to them, but there’s no way to know when or what the trigger might be. Currently, Liz Ann sees no warning signs signaling the market has peaked.
So, there you have it. Thank you to all who attended our annual Financial Forum. And for those of you who couldn’t make it, I hope you found this recap helpful.
