The adage “a rising tide lifts all the boats” was introduced to the American lexicon with President John F. Kennedy’s 1963 dedication of the Greers Ferry Dam in Heber Springs, Arkansas.
“This State…has a million cars…They were built in Detroit. As this State’s income rises, so does the income of Michigan. As the income of Michigan rises, so does the income of the United States. A rising tide lifts all the boats…So I regard this as an investment by the people of the United States in the United States.”
The nation has rebounded from the financial crisis, with unemployment dropping to 4.3 percent, far from a crisis high of 10 percent in March 2009.
Rather than being buoyed by the recovery, some people feel this “rising tide” has run them aground. While the labor market’s revival has been one of the strongest since WWII, it is important to note that fiscal policy has been contractionary, which is not usually seen after so deep a recession. Although monetary policy has been wildly expansionary, government spending decreased as the budget deficit’s share of GDP — falling 1 percent a year, on average, since 2010 — only the third such occurrence in more than 125 years, according to Goldman Sachs Investment Strategy Group’s “2017 Investment Outlook.” This has done much to keep GDP growth muted, resulting in gains that have been half the average of all prior post-WWII advances (see graph below).
Even with questions about the potential success of the new administration’s domestic agenda, our outlook remains net positive — with qualifiers. Roughly 70 percent of GDP is driven by personal consumption1 which has pulled back in the most recent reading. More than a function of economic weakness, this may be a persistent wound from the financial crisis. In “This Time Is Different: Eight Centuries of Financial Folly” (Carmen Reinhart, Kenneth Rogoff), the authors analyzed 200 years of historical data from 66 countries, finding that slow-growth recoveries that usually followed major financial crises are likely the result of prolonged personal savings. Household deleveraging occurred faster than any other post-WWII recovery, but with unemployment approaching its natural rate, and wage growth at 3.5 percent, according to the Wage Growth Tracker from the Atlanta Federal Reserve, increased consumption will likely follow. As such, it appears that the economy is on track to match its average annualized rate of 2.1-percent GDP growth seen during the recovery from 2009 until now.
The long-awaited shift to tighter monetary policy began with the first of four rate hikes, beginning in December 2015 and bookended by the June 14 increase. Despite disappointing retail sales and Consumer Price Index (CPI) readings, the Fed maintained its forward guidance for one more increase this year. The Fed will carefully need to balance its mandate of keeping inflation in check without extinguishing growth. Usually a headwind for stocks, the anticipated increases are regarded as largely benign — neither punitive to U.S. equities nor likely to induce a recession. Consensus expectations among Goldman Sachs, Citigroup and Wells Fargo analysts delay the possibility of a domestic recession until the second half of 2018.
However, a smooth ride isn’t guaranteed; with Wall Street’s fear index — the VIX —trending toward the lowest calendar year average since inception, an uptick in volatility can be expected.
With the S&P 500’s price-to-earnings ratio at 24.22, U.S. equity valuations appear stretched. This does not suggest the bull has entirely concluded its run but, rather, that a well-diversified portfolio (rebalanced to the appropriate target allocation) will be properly positioned should domestic equity markets experience a pull back. While the tide shows no signs of receding, it won’t be rising as fast as it once had.
Neither asset allocation nor diversification protects against a loss in declining markets. All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor.
The S&P 500 Index is an unmanaged capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries. The S&P 500 Index serves as a benchmark for U.S. large-company equities. It is not possible to invest directly in an index.