Equity indexes have been hitting new highs. This, of course, inspires talk of stretched valuations. How long can the ride last? When will it end? If investors knew the answer for sure, they would all be millionaires.
Related: WHAT IS FINANCIAL MODELING?
It’s A Different World
Historical comparisons are not useful when the underlying economic factors don’t align. For example, currently low interest rates change the game considerably. Some analysts and experts think the signs point to sustained economic expansion. Others are not so sure.
Either way, it’s a different world and one in which factors in play must be considered to understand what’s happening on the street. Some, for example, believe steady growth beyond the U.S. indicates that global expansion is sustainable, even likely.
Two More Years Of Growth
In the U.S., a majority of economists polled by Reuters said the current economic expansion would last at least another two years. At the same time, they indicated growth would not accelerate the way the Trump administration has suggested it would.
Recovery from the 2007-2009 financial crisis has already lasted 96 months. If poll predictions are accurate, this would mark the longest economic expansion in more than 150 years. Importantly, no economist polled by Reuters thinks the expansion will end in less than a year.
Trump’s 3% Growth Unlikely
U.S. President Donald Trump's promised 3% growth through tax cuts is not considered likely to happen. The failure to repeal and replace the Affordable Care Act, even with the recently announced executive order, is one factor mitigating such unprecedented growth. In other words, the economy is doing well just not that well.
Based on National Bureau of Economic Research data, predictions point to continued steady but sluggish average growth compared with previous cycles of the same length. GDP grew at a 2.6% annual pace in Q2, down from 2.7% in July. The trend, then, is roughly 2%, not 3%.
World Economy Robust
The world economy’s rate of acceleration has been stronger this year than early estimates indicated. There has been an upswing across nearly all the world’s major economies according to the International Monetary Fund (IMF) going into this week’s meeting of world finance chiefs.
As a result the IMF raised its forecast for growth to 3.6% this year and 3.7% next year. This is an uptick from the 3.2% growth recorded in 2016. In other terms, growth is up 0.1% in each year from forecasts made in July.
A Note Of Caution
Despite all the drum-beating, the IMF sounded a note of caution saying that recovery from 2007-09 is incomplete and that there are latent risks that could return within the next few years. The inflation outlook has softened since spring with the IMF lowering inflation forecasts to 1.7% in advanced economies below the 2% rate most of those economies target.
Financial markets could reverse, especially given the rise in stock prices. Monetary tightening is also a potential risk. The U.S. Federal Reserve has been raising interest rates and other world central banks have begun moving away from stimulus. There is also political risk, according to the IMF. Protectionism could reduce international trade and geopolitical tensions and domestic political tension could also tamp down economic growth.