Economic Updates

February 2018 Educational Economic Update with Tony Drake, CFP®

In this video, we will cover main topics that were part of the economic headlines in the last month and how those headlines influenced the markets and economic outlook. We will also try to give you some insight into what those influences might mean for you as an investor.

 

January 2018 is behind us, and stocks posted quite a positive start to the year. In fact, even anticipation of the first federal government shut down since 2013 didn’t derail markets. The S&P 500 and Dow both had their best monthly performance since March 2016, with each rising over 5%. The NASDAQ gained 7.3%, making January its best month since October 2015.

Several details that came out during the month indicated that a strengthening economy is driving market performance.

Initial readings of the gross domestic product (GDP) show the economy grew by 2.6% in the 4th quarter. Though smaller than projected, the increase still implies healthy economic growth.

Corporate earnings data also suggests that the economy continues to expand. During January, many companies released their earnings reports for the 4th quarter of 2017. By the end of the month, 81% of S&P 500 companies that had shared their earnings data beat expectations. And, 83% exceeded their revenue estimates.

In addition to growing corporate earnings, labor measures seem to illustrate that the economy is advancing. The ADP employment report indicates that private companies added more jobs in January than analysts expected.

Further, fewer people filed for unemployment in late January, keeping initial claims close to a 45-year low. Unemployment currently sits at 4.1%—and could go as low as 3.5% by the end of the year. And, wages are finally starting to pick up, too. According to the Labor Department, the employment cost index (ECI) in the fourth quarter was 2.6% higher than a year before. This increase is the largest since early 2015.

Examined together, you see a growing market, increasing corporate profits, low unemployment, and rising wages. But, this positive news is not without risks.

If the tight labor market leads to faster wage growth, inflation could increase. At that point, the Federal Reserve could start raising interest rates more quickly than anticipated. The Fed met at the end of January and decided to keep interest rates the same for now. They did indicate, however, that they expect inflation to increase over the next year.

After years of inflation missing the Fed’s 2% benchmark, the markets would have to decide how to react to prices increasing more rapidly. Ultimately, we have strong growth and corporate earnings on one side, and the potential for faster-than-anticipated interest rate increases on the other side.

Looking ahead, we will continue to analyze the interplay between economic growth and inflation. Only time —and data — will tell exactly how these connected pieces will come together. But, we will work to keep you informed along the way.

That’s it for this month’s educational economic update.

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