We view a recession this year as unlikely given optimistic consumers, healthy wage growth and solid business investment. Slowing but still-positive economic fundamentals serve as a supportive backdrop for a further rise in share prices ahead, albeit with more volatility.
Solid fundamentals help extend the expansion – As shown in the chart, personal consumer expenditure (PCE), nonresidential investment, government spending and private inventories contributed to economic growth in 2018, while residential investment and net exports were a drag on growth. Consumer spending made up more than 60% of the economic growth for the year.
Consumers are well-positioned – An unemployment rate near a 50-year low and wages rising at the fastest pace of the 10-year cycle continue to fortify consumer balance sheets. Households are saving 7.5% of their incomes, above the 10-year average of 7.1%. Meanwhile, homeowner home equity (the difference between a home’s value and the mortgage debt owed) is at a record high $15.54 trillion. Lower interest rates keep households well-positioned to sustain a solid pace of spending for the remainder of the year.
Business investment slowing but steady – The pace of business investment slowed over the course of 2018 as the stimulus from federal tax cuts faded. Even so, nonresidential investment contributed a solid 0 .92% to real GDP growth, as shown in the chart. Lower interest rates should help support more modest but solid business investment this year.
Slower growth can support rising equities – We expect growth to slow to near the 10-year average of 2.3%, with still-solid consumer spending and business investment providing a positive support for earnings to rise, with some bumps along the way.
Healthy consumer spending signals that economic growth will continue this year. As the bull market continues to mature, owning an appropriate mix of equities and bonds can help reduce the impact of swings in equity prices and increase the probability of positive portfolio returns over the long term.
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