The Value Line View, which can be found inside the Selection & Opinion section of the well-known Value Line Investment Survey™, discusses the current business environment, and analyzes the economic and interest rate trends as they can affect the stock market. Since many investors and financial professionals incorporate analyst opinion into their current investment strategies, we’ve made The Value Line View available to you as an added value.
Economic and Stock Market Commentary
The first half of this year is shaping up as a tale of two divergent quarters, with the opening period’s undistinguished performance likely being followed by a decidedly better showing in the current three months. True, the first quarter’s pedestrian 1.2% increase in the gross domestic product was partly a seasonal phenomenon. However, there also were lesser rates of consumer and defense spending, and a notable drawdown in inventories. By comparison, the second quarter is likely to see a seasonal catch-up in consumer spending, gains in defense and business outlays, and a solid rebuilding of inventories. That combination should lift GDP growth into the 3% range.
More consistency is likely in the second half, with fewer seasonal adjustments, but continuing gains in consumer spending and capital goods demand, and further resilience in homebuilding likely to be key themes in this mature economic expansion. That persisting strength should enable growth to average about 2.5% in the third and fourth quarters, lifting the projected rise in GDP for the full 12 months into the 2.0%-2.5% range, up from 1.6% in 2016.
Meanwhile, politics in Washington may play an increasing role, with efforts to revise health care, bring about tax reform, further loosen regulations, and generate needed improvements in the nation’s infrastructure all on the negotiating table and some likely to face notable opposition. Success in these politically charged categories probably would be needed if our forecast of a further step-up in growth in 2018 is to be realized.
Recent events underscore the dangers the world is now enduring. Not only do we face lingering conflicts in the fractious Middle East, with Russia, and with North Korea, but as recent attacks around the world have affirmed, the global terror threat has not diminished.
Meanwhile, the bulls continue to show their determination, coming back quickly from a brief, but sharp, mid-May selloff. Solid earnings support, largely improving economic fundamentals, and the likelihood that a cautious Federal Reserve will just gingerly step on the monetary brakes this year continue to help offset the political headwinds domestically and the perpetual crises abroad.
Conclusion: Such ongoing support is pivotal, as P/E ratios remain at levels that leave little margin for error. Please refer to the inside back cover of Selection & Opinion for our statistically-based Asset Allocation Model’s current reading.