How Strong Is the Economy Really?

The economy continues its improvement and keeps showings its strength

The U.S. economy has been showing many signs of strength during the past few months. Annualized gross domestic product is still growing at 2.2% according to the latest first-quarter 2018 data from the Bureau of Economic Analysis (BEA), unemployment of 3.8% is at its lowest level since 2000 and the Labor Department said Tuesday that the number of job openings has exceeded the number of people who are looking for jobs for the first time since it began keeping records of this relationship in 2000.

But how strong is the economy really?

Where Is the Economy Going?

While some may worry that the economy has hit its peak and has nowhere to go but down from here, we believe the same slow-and-steady growth economy we have become accustomed to since the end of the Financial Crisis of 2008 is still with us and has some room left to run.

We’re not alone in this belief. According to the Wall Street Journal, more than 92% of forecasters surveyed believe that the next U.S. recession will not come until the year 2020, or later.

Now, we’ll be the first to admit that forecasters are often wrong, and nobody can see into the future. However, that goes both ways. Nobody can definitively say a recession won’t come until after 2020, but nobody can say a recession is right around the corner in late 2018 either.

So where does that leave us as investors?

We think the best approach is a pragmatic one of assessing the current economic environment, gauging sentiment on Wall Street and being aware of the potential catalysts that could change the trajectory of either of those two things.

Here’s what we are looking at:

The latest U.S. economic data have been strong. This provides a strong base for the time being.

Wall Street has shown it is cautiously optimistic, as it has sent the Russell 2000 index to a series of new all-time highs during the past few weeks (see Fig. 1) and the CBOE Volatility Index (VIX) to its lowest level since the S&P 500 started to pull back from its all-time high on Jan. 29 (see Fig. 2).

Fig. 1 — Daily Chart of the Russell 2000 (RUT)

Fig. 2 — Daily Chart of the CBOE Volatility Index (VIX)

Earnings expectations remain high, with analysts forecasting 18.9% year-over-year earnings growth for the S&P 500 for the second quarter of 2018.

Corporate America is still buying back shares of stock by the fistful. This should continue to boost earnings per share (EPS).

Traders are still concerned about a number of things: the potential impact of an escalation in trade-war rhetoric; the dampening effect a reduction of U.S. exports or an increase in the cost of U.S. imports could have on the economy; the impact that rising inflation could have on the Fed’s decision on how aggressively to raise interest rates; the impact that political unrest in Italy could have on the global financial markets; and whether oil prices are going to climb high enough to curb discretionary consumer spending.

For the time being, however, they appear content to “climb the wall of worry” by buying stocks and pushing them higher.

The Bottom Line

The U.S. economy is currently strong and stable, and it appears Wall Street believes — barring some catastrophic geopolitical upheaval — that it is likely to remain that way for the foreseeable future.

You can learn more about identifying price patterns and using them to project how far you think a stock is going to move in our Advanced Technical Analysis Program.

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