Economic Update September 2019

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September 30, 2019

By: John E. Silvia

Five economic fundamentals provide a basis for good due diligence when considering the structure of your investment portfolio. These five fundamentals are growth, inflation, interest rates, the dollar and corporate profits.

What are your expectations for growth – recession, slowdown, continued moderate growth? The strength of economic growth tends to be associated with strength in the equity markets and therefore signals to the extent and type of equity investments you are looking for in your portfolio.

How about inflation? For some time now, inflation has remained below 2%, the Federal Reserve Board’s target, and clearly has not accelerated as would be expected given the decline and low level of unemployment. Should we anticipate a pickup in inflation or continued low inflation given the impact of global competitive pressures and even slower global growth in recent months?

A path for interest rates reflects the influence of expectations on Federal Reserve policy at the short end of the yield curve and expectations for growth and inflation at the long end of the curve. For now, the Fed cut its benchmark interest rate another quarter point at its September meeting and are expected to ease again by December. Meanwhile, slower economic global growth and continued low inflation favor continued low long-term interest rates. The global search for yield continues.

Our dollar exchange rate remains strong thereby reducing the price of imports but lowering the price advantage of exports. This pattern results in the relative performance of companies that import relative to exports. Why dollar strength? Relative growth and higher interest rates continue to favor the U.S. dollar versus other currencies.

Finally, the pace of expected profit growth reflects the expected pace of the economy and unit labor costs. In recent quarters, profit growth has slowed and unit costs have risen suggesting caution for investors going forward.

These five fundamentals provide the basis for good due diligence in structuring an economic outlook for investors. Going forward we will focus on these fundamentals and their evolution over time.

John E. Silvia is the Director of Economics for Carolinas Investment Consulting LLC. Click here to learn more about John.

Carolinas Investment Consulting is not affiliated with any of the websites linked in this commentary. Nothing contained herein constitutes financial, legal, tax, or other advice. The views and opinions expressed in this article are those of the author and do not necessarily reflect the official policy or position of Carolinas Investment Consulting. The information published herein is provided for informational purposes only, and does not constitute an offer, solicitation or recommendation to sell or an offer to buy securities, investment products or investment advisory services. All information, views, opinions and estimates are subject to change or correction without notice. The appropriateness of an investment or strategy will depend on an investor’s circumstances and objectives. These opinions may not fit to your financial status, risk and return preferences. Past performance is not indicative of future returns.

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