JP Morgan's weekly update offers a snapshot of changes in the economy and potential implications for investors. This week's investment themes include:
• Earnings growth, coupled with slowly rising interest rates, makes stocks look attractive in relative terms.
• High-yield bonds look more attractive than Treasuries, but a diversified approach to fixed income investing seems appropriate given Fed tightening.
• International exposure is warranted given growth prospects abroad, and a weaker dollar can enhance foreign returns.
- Growth: Economic growth in 3Q17 was revised slightly lower in the final estimate, hitting an annualized rate of 3.2% and registering the fastest growth rate since 2014. Consumer spending was revised down slightly to 2.2% from 2.3% in the quarter, a solid pace despite likely being suppressed by the recent hurricanes. Equipment spending was the bright spot in the revision, improving to 10.8% from 10.4%, indicating that businesses continue to increase capex spending. Inventories were revised slightly lower, though export growth contributed positively to growth. We expect economic growth to remain robust in the last quarter of the year, supported by hurricane rebuilding, and some fiscal stimulus could sustain strong growth for the first half of 2018 before a second-half slowdown.
- Inflation: November inflation data was a bit mixed. Headline CPI rose to 2.2% y/y on the back of higher gasoline prices, yet the core measure (less food and energy) cooled to 1.7% y/y, which can be attributed to a sharp decline in apparel and a small decline in housing. However, some signs of future inflation appear positive through producer prices, which rose 3.1% y/y. Importantly, the Fed expects inflation to stabilize at its 2% target over the medium term, indicating current low readings should not take its rate hiking schedule off course.
- Jobs: The November employment report showed that the U.S. economy added 228,000 jobs last month, and was accompanied by a downward revision to last month's number. The unemployment rate and participation rate remained at 4.1% and 62.7%, respectively. Wage growth picked up slightly last month as production and non-supervisory wage growth accelerated to 2.3% y/y. The November payroll gains show that the labor market continues to remain tight.
Read JP Morgan's Fed fund rate predictions and learn about potential risks for investors in 2018 by downloading the full commentary from JP Morgan. Or, read BlackRock's 2018 Global Investing Outlook for their take on 2018 investing trends.
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