You impatiently tap the steering wheel waiting for the light to turn green. After what seems like an eternity, the light flashes green and you hit the gas. Your car begins moving forward, but the speedometer still shows a speed well below the speed limit. Your foot remains on the gas, increasing the speed of your car at an accelerating rate. Not only are you moving forward, but you’re doing so at a faster and faster rate—until you hit the speed limit. The light ahead changes red and you remove your foot from the gas. You are still moving forward, but at a slower and slower rate—decelerating.
Economies and markets tend to behave much like cars accelerating or decelerating. Best pay attention when approaching red lights…
U.S. economic growth, as measured by real GDP, has been accelerating for eight consecutive quarters. This is the longest acceleration in growth in the post-World War II era, even besting the string of seven quarters of acceleration starting in the first quarter of 1991.
Accelerating growth has provided U.S. equity investors with hefty returns the last few years. However, the light ahead appears red and the average forecaster has not seemed to take notice—yet.
After such a long acceleration, it becomes mathematically more challenging to continue growing at a faster rate off a larger base. We believe the economy will still grow, but will probably do so at a decelerating rate as we proceed through the remainder of 2018 into 2019. This does not necessarily imply the U.S. economy is headed for a recession—which would be akin to stopping at the red light, putting the car in reverse, and backing up over the ground already covered.
This change in the cadence of growth will likely have significant impacts for future returns and do so in the context of higher levels of volatility. Historically, environments characterized by slowing growth have been punctuated by changes in investors’ willingness to take risk.
As growth slows, certain sectors like consumer staples, real estate and utilities tend to perform relatively better, while financials, industrials and technology underperform the broader equity market. This type of environment often reminds diversified investors why they have exposure to bonds in their portfolios, too—to dampen volatility and generate a predictable income stream.
Markets are designed to discount these phase transitions in advance. In other words, prices don’t stand still until events occur. The collective investment community is constantly updating its assumptions of future economic outcomes (and their impact on the relative attractiveness of investments), which has a direct impact on the marginal fluctuation of asset prices today. We stand ready to make tactical adjustments as the coming months unfold. iBi
Patrick V. Masso, CFA, is vice president and investments team leader at Heartland Bank Wealth Management. For more ideas and discussion, contact the Heartland Bank Wealth Management Team or visit hbtbank.com/wealth-management.
Securities and insurance products are not deposits of Heartland Bank, are not FDIC insured, are not guaranteed by or obligations of the bank, are not insured by any government agency, and are subject to potential fluctuation in return. This information is not intended to be and should not be treated as legal advice. Readers should under no circumstances rely upon this information as a substitute for their own research or for obtaining specific advice from their own counsel.
