By David Guttery
Special to The Tribune
There are many positive forces that are impacting markets and the economy right now, and we anticipate that those forces will continue to gather momentum throughout the year. However, this also stands to be another year of political unrest, and the markets will be paying close attention to these developments.
Politically, many House and Senate seats will be up for re-election in 2018, and thus the balance of legislative power will be in focus.
We will also begin to see the impact of the Tax Cuts and Jobs Act of 2017, which could spur significant economic growth, and result in greater employment metrics, and higher income.
Tax reform will be impactful on two fronts. From the corporate perspective, companies have been sitting on growing amounts of cash for years. Cap Ex spending has not been at historically normal levels, and this was due in part to the presence of lending restrictions, provisions of Obamacare, and other factors of regulation. Those have already been largely rolled back.
According to Haver Analytics, nominal levels of corporate cash have never been higher.
They want to spend, and now, burdens of taxation will be lower, and the opportunity to repatriate dollars will be lucrative. We expect this to translate into higher levels of spending, on capital equipment, expansion of plants, and acquisition of human resources.
On the personal side, as jobs are increasingly plentiful, and incomes rise both as a function of higher wages and lower taxes, we expect consumer confidence to increase as well.
Confident consumers spend money at higher rates, and such account for about 70 percent of economic growth. It’s the beginning of a positive economic feedback loop, and one that we haven’t seen in over a decade.
In my opinion, areas of the market that could prosper in this growth environment would be energy, banking, diversified financials, process automation technology, defense, and growth companies in general. I would expect the dollar to continue weakening against the global basket of currencies throughout 2018, and for the 10 year treasury yield to move higher. These factors would be a tailwind to the energy and banking sectors.
Greater consumer confidence and spending would be of benefit to diversified financials, and especially those in the consumer financial space. In November, $700 billion was appropriated to defense spending and this remains a commitment of the Trump Administration, so the defense sector will likely benefit in the face of growing international unrest.
I would expect automation technology to benefit from the return of corporate cap ex spending. Lastly, with an economy earmarked by a higher velocity of money, higher inflation, interest rates, and weakening dollars, growth companies in general should fare better than their value counterparts.
Sometimes you arrive at a point of inflection where that which worked in the past, doesn’t work so well when economic conditions change. We’re at such a point now. Having an understanding of the economy and the financial physics of the market is critical as we transition into an accelerating growth economy.
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David has been in practice for 27 years, with a distinctive focus on the management of retirement assets for the production of durable income. David R. Guttery, RFC, RFS, CAM, is an Investment Advisory Representative of Ameritas Investment Corp, and President of Keystone Financial Group, in Trussville, Alabama. David independently offers securities and investment advisory services through Ameritas Investment Corp. (AIC) member FINRA/SIPC. AIC and Keystone Financial Group are not affiliated. Additional products and services may be available through David R. Guttery or Keystone Financial Group that are not offered through AIC.