At our 2017 Holiday Breakfast, Matt Wilson and I gave a presentation to our clients, families, and friends that analyzed the state of the economy at the end of a record year and attempted some predictions for where we could be headed in 2018.
So, halfway through the year, how’d we do?
At the risk of jinxing it, I’d say pretty good!
My Keen Wealth team expected some market volatility heading into the new year, but we felt that solid economic growth would help prevent a major downturn. And that’s pretty much where we’re sitting in July of 2018, although the current flat markets and our ongoing political dramas do have some investors nervous.
On today’s show, we talk about what happened in the first six months of the year and try to anticipate how those events and trends might be setting us up for the second half of 2018.
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Key Insights on 2018 at Midyear
1. A “flat market” is not a crisis.
There’s been quite a bit of hand-wringing about the “flat” or “sideways” markets ever since the 10% correction earlier this year. And while regular listeners and readers know that volatility was expected in 2018 after 2017’s record highs, that hasn’t stopped the media from trying to spin our current market numbers into a click-worthy crisis.
Anyone who’s taken grade school science knows the old adage: what goes up must come down. But that’s not always true. The markets and economy have trended higher over the long term. There will be periods of time when the markets “back and fill” during the long-term advance. The 10% pullback was a perfectly healthy correction in the normal market cycle that allowed corporate earnings to catch up with stock prices.
In fact, if you ever find yourself talking to an advisor or broker who promises you double-digit returns, uninterrupted, year after year, run as fast as you can in the opposite direction. You know who promised his clients those kinds of returns? The scam artist Bernie Madoff!
2. Our economy is still trending positive.
During our discussion of the Dow delisting General Electric, we talked about how our economy is much bigger than any one company or any one statistic.
Unemployment sits at 3.8%, and some experts are predicting we could see lows of 3% before the end of the year. Even better, initial jobless claims are at their lowest levels ever. That tells us corporate America is feeling positive about the economy, otherwise they’d be reducing their overhead and people would be filing for unemployment. In fact, right now, there are more available jobs than there are people looking for work! That’s why a certain amount of automation and outsourcing is good for the economy: it lets companies fill those jobs and keep productivity – and corporate earnings – trending higher.
Another big positive: total household wealth in the US is up to $100 trillion – that’s TRILLION, with a T! Because people are feeling secure about their employment and their money, the consumer sentiment index is up. Brick and mortar sales are going to continue to struggle, but online sales continue to grow. Commodity prices, like corn and wheat, are up.
Finally, new housing permits and starts are continuing to climb back out of 2008-09 recession levels.
What all that means in total is that both corporations and consumers are feeling good about the economy. The Federal Reserve obviously shares that sentiment, because they raised interest rates to keep inflation from getting out of control.
3. What could go wrong?
The number one thing we have to remember is that 2017 was not an ordinary year for the markets. That kind of uninterrupted growth is pretty rare so investors can’t expect it to happen again. Even as earnings are finally catching up to 2017’s highs and evening out the economy, more volatility is possible.
Some experts worry that stagnant wages might hurt the economy in the second half of 2018. And while it’s true wage growth hasn’t been great, part of that is due to high-earning baby boomers retiring, and entry-level millennial workers replacing them, skewing the average wage data lower.
Another indicator we’re paying close attention to is the yield curve, which measures the differences in US treasury debt, like 2-year and 10-year government bonds. High demand for long-term bonds could cause an inversion if short-term bonds are paying more interest. In the past, that’s been an early warning flag for a recession.
We also have to see how changes to our fiscal policy play out. If the Federal Reserve raises interest rates too high too quickly, or if the new tariffs drag down earnings for some companies, that could cause the markets some heartburn.
Finally, as much as we try to caution our clients against letting events outside the market affect their money, unpredictable X factors like natural disasters and politics could rattle some investors and shake up the markets as well.
My team at Keen Wealth is always very cautious about making short-term market calls. But the numbers we’ve discussed today all add up to a very solid base from which the markets could grow in the second half of 2018. But here’s one more thing to keep in mind—it’s not what the Dow or the S&P 500 index is doing that matters most. What really matters is whether or not you are on track to meet your financial and life goals. And we are laser-focused on helping you stay on that track regardless of what the markets do.
So, if you have any concerns about the markets or whether you are on track, come in and talk to one of my fiduciary advisors.
Bill Keen on the 2018 at Midyear…
“The number one thing we have to remember is that 2017 was not an ordinary year for the markets. That kind of uninterrupted growth is pretty rare so investors can’t expect it to happen again. Even as earnings are finally catching up to 2017’s highs and evening out the economy, more volatility is possible.”
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Bill Keen is a CHARTERED RETIREMENT PLANNING COUNSELOR℠ and independent financial advisor with more than 25 years of industry experience. As the founder and CEO of Keen Wealth Advisors, a registered investment advisory firm, he specializes in providing personalized retirement planning designed to help people thrive before and during their retirement years. With a passion for educating others, Bill regularly blogs about retirement planning, hosts the podcast Keen on Retirement, and has contributed to U.S. News and World Report, Reuters, Wall Street Journal’s Market Watch, Yahoo Finance, and other publications. Based in Overland Park, Kansas, Bill and his team work with clients throughout the greater Kansas City area and across the nation. To learn more, connect with him on LinkedIn or visit www.keenwealthadvisors.com.
Keen Wealth Advisors is a Registered Investment Adviser. Nothing within this commentary constitutes investment advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Keen Wealth Advisors manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed here. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.