Is the US Economy Heating Up Too Fast?

It wouldn’t be a stretch of the imagination to state that the US economy’s performance is the envy of many other countries. For starters, the NASDAQ composite index is trading around 7,746.38, well above the 50-day moving average of 7,332.75, and the 200-day moving average of 7,020.94. When an index is rising relative to its 50 and 200-day MAs, this is a sign of bullish behavior.

The optimism doesn’t end there though.

The vaunted Dow Jones Industrial Average is trading at 25,090.48, significantly above its 50-day moving average of 24,612.01, and it’s 200-day moving average of 24,197.69. The bullish trend gained momentum in early May and continues to surge despite several slight pullbacks. Even the S&P 500 index is enjoying runaway success levels, rising ahead of its 50-day moving average figure from early May to its current level of 2,779.66. The lesson to be taken from the current performance of US bourses is clear: stock markets are running red hot, and it’s largely thanks to the pro-growth policies put in place by the current administration.

Leading investment strategist, Jim Paulsen believes that real GDP will rise towards 4.5% for Q2 2018. Mere mention of this type of figure was laughable when Trump was elected to the highest office, but now it’s a short-term reality that market players are contending with. Coupled with 18-year low unemployment at just 3.8%, tightness in the labor markets is going to have a massive impact on general prices. Consider the following percentages as evidence of the bullish performance of major US bourses:

  • The S&P volatility index is up just 2.11% for the year
  • The NASDAQ Composite index is up 24.16% for the year
  • The NASDAQ 100 index is up 25.70% for the year
  • The Dow Jones Industrial Average is up 17.33% for the year
  • The S&P 500 Index is up 14.24% for the year

Compared to European markets like the FTSE 100 index (+2.28%), the DAX (+2.02%), the CAC 40 (+4.53%), US markets are on fire. An important economic indicator – the GDP tracker at the Atlanta Federal Reserve Bank reflects that the US economy is on track to reach a 4.8% GDP for Q2 2018. There is some concern about the impact of robust growth, tight labor markets, and overall economic prosperity on inflationary pressures. We are already seeing a movement towards higher costs and higher interest rates, as evidenced by the Federal Reserve Bank FOMC decisions to hike interest rates to the current level of 1.75% – 2.00%.

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The next meeting of the Fed takes place on August 1, 2018, and there is a slim chance of just 2.0% that the Fed will raise rates in the region of 2.00% – 2.25% (25 basis points) when policymakers next meet under Jerome Powell. Higher interest rates do not bode well for overall economic growth. For starters, the cost of mortgages and other lines of credit increases sharply when interest rates rise. We are already seeing evidence of higher interest rates impacting the economy with increasing credit card debt and lower personal disposable income levels.

One of the leading trading brokerages, Wilkins Finance believes that weaker economic growth may not necessarily put a damper on the Fed’s desire to increase interest rates before the year is over. When market expectations are tempered, fiscal discipline could be enforced. This is particularly true in the fixed-income market where yields increase when purchasing volume decreases. The US government under Trump imposed $50 billion worth of trade tariffs on China, which was met in near-equal measure by $34 billion worth of trade tariffs on the US. It is clear that an economic slowdown in Europe is migrating across the Atlantic towards the US. Trade tariffs will not necessarily be of much benefit to the US, since foreign actors can also impose similar measures on US imports.

 

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