Schwab calls it a Goldilocks scenario, not too hot nor too cold. LPL says to expect more of the same and TIAA Investments, parent company of Nuveen, foresees a flatter trajectory. They’re all referring to mid-year outlooks for the U.S. economy and U.S. stocks.
Despite recent record highs in all three major stock market indexes – including a new record set Friday for the Dow at 21,384 – strategists are not expecting big gains in the stock market, if any. And economists are forecasting moderate growth, well below the 3% that the president had been touting.
There are several reasons for this, key among them the absence of the major catalysts that underpinned the economic recovery and stock rally since the financial crisis: extremely easy monetary policy orchestrated by the Federal Reserve and optimism about pending fiscal policies from the Trump Administration, including tax cuts and infrastructure spending.
The Fed is now withdrawing monetary accommodation by raising interest rates and is preparing to reduce a $4.5 trillion balance sheet swollen by securities purchases at the heart of its quantititative easing strategy. And the likelihood of bold fiscal initiatives and reform from the Trump Administration and Republican Congress are fading.
“There is little reason to expect federal spending to add meaningfully to GDP in the next several quarters,” writes Brian Nick, chief investment strategist at TIAA Investments. “Neither the cloud of investigation currently hanging over the U.S. Capitol nor the low approval ratings of President Trump and Congress are conducive to navigating complex bills to passage.”
Strategists don’t expect major changes in U.S. fiscal policy until next year at the earliest and any impact until even later.
The timing of changes in fiscal and regulatory policies has become so “murky,” that “any impact on growth, rates and inflation may not materialize until at least the second half of 2018,” write Michael Arone, chief investment strategist for State Street’s US SPDR Business and Matthew Bartolini, head of SPDR Americas Research, in State Street’s midyear investment outlook.
That outlook is based on State Street’s survey of over 720 investment professionals. They listed the political gridlock in Washington plus the new White House administration as one of their top three concerns. Geopolitical tensions and stretched valuations in U.S. equities were the other two.