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The Markets This Week

April 23, 2018 | Weekly Commentary

by Connor Darrell, Head of Investments
Earnings season is now in full gear and the initial data has been quite strong.  According to Factset, a little less than 20% of S&P 500 companies have reported earnings thus far, and the blended earnings growth rate for these companies has been 18.3%.  The healthy earnings growth pushed equity markets higher for the second straight week, while bonds finished down as the ten year Treasury note pushed close to 3%.  The 3% threshold will be an important milestone in the normalization of interest rates.  Rising interest rates have been discussed ad nauseam in financial news outlets, but are a natural part of the economic cycle and should be expected to continue as the economy strengthens.  The Bureau of Economic Analysis will release its first estimate of Q1 2018 GDP growth this week, and investors will likely be focusing on the year over year numbers as they look for further evidence of an improving economy.

What Happened To the Infrastructure Bill?
Following the passage of tax reform at the end of last year, it was widely expected that lawmakers would quickly shift their attention to infrastructure.  For the time being, scandals, international tensions, and unrest within the Trump Administration seem to have slowed the legislative momentum established following the tax victory, and it now looks unlikely that an infrastructure spending bill will be introduced in Congress until after the mid-term elections in November.  From a market perspective, the delay is unlikely to have major implications, but from an economic growth standpoint, an infrastructure bill could be an interesting wild card.

In terms of economic impact, infrastructure spending has similar effects to tax cuts.  The increased spending on projects should have a positive impact on labor markets and create new jobs.  In theory, those workers then have more money in their pockets to spend on goods and services, which should be a tailwind for economic growth.  Many observers have been quick to point out that some aspects of the tax bill are “front loaded”, in that their effects phase out over time.  An infrastructure bill passed during 2019 could potentially pick up some of the slack and help to carry growth momentum a little bit further, essentially allowing us to squeeze even more juice out of this long expansion.  Given that outlook, it is entirely possible that this becomes the longest economic expansion in history, exceeding the period from 1991 to 2001 when the US experienced 120 straight months of economic growth.  Given that the current expansion is already over 105 months old, there isn’t a lot further to go.

Of course all of this is incredibly difficult to project with any real degree of confidence, especially when considering the myriad of external factors and the possibility of significant changes to the composition of congress following the mid-term elections.  But even without further stimulus in the form of infrastructure spending, the economy remains on firm footing and the risks of recession remain relatively low in the immediate future.

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