Why The Economic Slowdown Will Rattle Stock Investors

The economy, as measured by gross domestic product (GDP), grew at 4.2% in the second quarter. It slowed to 3.5% in the third quarter. Meanwhile, Q4 projections have been coming in closer to 2.9%.

An optimistic “take” would be to exclaim that the 2% pace that has been the hallmark of the current expansion is now in the rear-view mirror. For 2018 and beyond, we have kicked it into a higher gear (3%) due to tax cuts and regulation curtailment.

A less rosy perspective? Economic growth has peaked.

Keep in mind, the U.S. economy required $3.5 trillion in Federal Reserve bond-buying stimulus and $9.8 trillion in new government debt to maintain the “New Normal” (2%) from 2009-2017. Tax cuts financed by $1 trillion plus in new debt in 2018, coupled with a Fed that has yet to reduce its balance sheet meaningfully ($4.1 trillion), has taken us to a 3% annual average temporarily. Going forward? Federal Reserve balance sheet reduction combined with tighter rate policy will slow the economic growth train.

In the recent past, economic contraction around the globe (Q3 2015 – Q1 2016) nearly brought the U.S. to its knees. The Bank of Japan and the European Central Bank provided shock-n-awe levels of bond buying with electronic currency credits. The U.S. Fed slashed plans for four rate hikes down to a token hike slated for the end of 2016. And the U.S. economy averted recessionary pressure.
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