PNC Economists Assess Economy Halfway Through 2017

PITTSBURGH — Just a year ago, Britain surprisingly exited the European Union, a heated U.S. presidential race entered its final lap, and the stock market reached a 52-week low. Fast forward to today, and we’re looking at a much different picture.

When it comes to today’s economy, upside potential co-exists with downside risks, making for a “balanced” outlook, according to PNC Senior Economic Advisor Stuart Hoffman. For financial markets, three-quarters of stocks are trending upward and all indexes are nearing record highs, said Global Chief Investment Strategist Bill Stone.

Although fiscal policy — in the form of potential tax cuts, infrastructure spending and deregulation — likely will not stimulate the economy until 2018 and beyond, and real GDP growth remains stuck in the slow lane at 2 percent, consumers and businesses exude confidence in prospects for good things to come.

That confidence, combined with key economic indicators, give Hoffman optimism that the U.S. economic expansion — now eight years old — gradually should start to pick up.

“What it’s lacked in strength, it’s made up for in length,” he said. “But we don’t see any signs that the economy is anywhere near a recession.”

Hoffman notes why:

• Household debt is in very good shape. Oil prices are down, income is up, and we’re seeing a rebound in consumer spending. The demise of the American consumer has been greatly exaggerated.
• Home buying is on the rise. Mortgage applications for home purchases are up 5 percent from last spring. Home buying is going to be better than what we saw last year.
• Corporate earnings are growing. This means business confidence is high.

As a result, the Federal Open Market Committee (FOMC) raised short-term interest rates at its June meeting as anticipated.

After keeping the benchmark lending rate near zero from 2009 to late 2015, the FOMC now has raised it three times since December 2016, and may hike it again in December.

Financial Markets: Bullish On Stocks

A bright economic picture — both here and abroad — bodes well for the stock market, Stone noted.

He addressed a few frequently asked questions by investors:

Are only a few stocks driving the market up?

Stone: The big four — Facebook, Amazon, Netflix and Google — are doing extremely well, but they’re not the only stocks driving the positive returns we’re seeing. Average stock returns are up 6.6 percent.

Has the so-called “Trump trade” influenced the market’s rise?

Stone: While the S&P 500 has gained about 13 percent since the presidential election, fundamental drivers seem to account for a good portion of this rise rather than solely euphoria related to anticipated tax cuts and other policies that would spur the economy.

Fundamentals – like corporate earnings, which are seeing their best growth in six years – started to improve before the new administration took office.

What does the interest rate hike mean for investors?

Stone: Stock markets already priced in the interest rate hike before the June FOMC meeting, so they were little changed with the news. We remain optimistic on stocks based on better global economic momentum and earnings upside.

Where should investors focus now?

Stone: We remain positive on stocks versus bonds and cash. Also, consider periodic rebalancing of your investment portfolio to help ensure you’re meeting your goals.

SOURCE: PNC Financial Services Group Inc.

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