2017 was set-up to be different. It would be unique, for so many reasons. The Bull Market entered its 9th year. Political change has been the theme around the globe. The UK is leaving the EU. The Giants broke their even year streak. The Patriots had a historic comeback. Even Bonnie & Clyde just made a memorable return. Yes, 2017 was destined to be different than any year we’ve experienced.
The great news is, the US economy is growing. Entering the year, consensus expectations were for 2% growth. It’s coming in faster. It began accelerating last Spring and grew at a 3.5% rate over the Summer. A quick recent pause should lead to growth accelerating again in 2017. You may recall, the American Consumer represents 70% of economic output. Domestic demand growth remains healthy. The Labor Market has been consistent and solid. Consumer spending is picking up. They’re spending more on higher ticket items. The savings rate has been pushing 6%, which is twice what it was a decade ago. It looks like it’s going to slide. Americans are opening up their wallets again. Household balance sheets in general are very healthy. Debt to income is low. Americans have been more disciplined post-crisis. Business spending is on the rise as well. To be clear, that certainly doesn’t mean all Americans are benefitting. But the US economic engine is moving again.
It’s growing overseas too. The recovery is broadening this year. The global economy should grow around 3.5% this year and there will be even faster growth in the Emerging Markets. India is now the fastest growing major economy, expanding at a 7% rate. Japan is finally seeing price inflation for first time in over a year. Remember the negative interest rates? Europe entered the year on an economic upswing, but still has a tough road ahead. A formal beginning of Brexit and the French elections were marked on the calendar for March. We have officially entered March, and still have no clarity on these issues. Stay tuned.
For those that have followed the Janet Yellen-led Fed, you know how cautious she is and how reluctant she has been to tighten monetary policy. But tighten she has. The Fed outlined 3 more interest rate hikes for 2017. A rate hike in March was not initially expected. Now it is and it’s looking like 4 hikes are coming this year. The Market seems ok with it. The Market is now pricing in an 82% probability of an interest rate increase in 2 weeks. It was a mere 13% chance just 3 weeks ago. The Bond Market, the smartest of all Markets, is telling us growth and inflation are real. The benchmark 10-Year Treasury yield has jumped back to 2.5%. It has nearly doubled since its multi-year low last Summer at 1.3%. Times have changed. Growth is accelerating. Rates are rising for the right reasons for the first time in over a decade. A year ago, the Market panicked about the prospects of higher rates. Now it’s celebrating.
The Dollar has been really strong too, particularly with expectations of higher rates. But a growing global economy should see foreign currencies strengthen against the Dollar for the first time in a while. That means Europe might not be as cheap this Summer. A room at the Marriott in Paris along the Champs-Elysees tomorrow night costs 455 Euros. That’s $482 in today’s currency conversion. It would have been over $500 last Summer and $650 a decade ago. You get the picture.
2017 is a new breed. The last 8 years were considered the “New Normal”, after the Financial Crisis. Sub 2% economic growth was considered permanent. The global economy was desperately dependent on central bank stimulus. That is no longer the case. We believe that new normal is old and over. Normal is a word that doesn’t necessarily reflect 2017. Tighten those seat belts. It’s going to be a bumpy ride. We’re with you all the way.
Enjoy the weekend. We’ll be back, dark and early on Monday.