What can often be the most frustrating part of my job and ironically the area investors enjoy discussing most, is the spontaneous and ongoing geopolitical events that surround the underlying economic data. It is not to say they are not important, but they often make for better news headlines and can cloud the fundamentals at which a strong or weak economy is graded on.
Situations I am closely watching at this point include:
– U.S. debt ceiling debate
– Italian national election
– North Korea situation
– Pending trade deals with the G-20 nations
The biggest risk, at this point, appears to be the debt ceiling. This will require action by late summer, most likely. Should Democrats and Republicans be unable to agree, it could rattle financial markets. In the abstract, it’s hard to see what the problem is. All of the borrowing is to pay for spending specifically authorized by Congress itself. Not raising the debt limit is equivalent to whipping out the credit card and then not paying the bill when it comes due. This has not stopped the debt ceiling from becoming a perennial problem, however.
Part of me says this time will be the same as last time. We will see both sides pushing to get maximal concessions on their priorities, trying hard to use the risk of not raising the limit to force agreement on their terms.
Even if we do get a debt ceiling face-off, or any of the other potential issues, known or unknown, the underlying strength of the economy is likely to limit the damage. We have seen many situations in the not-so-distant past that were equally as scary and they didn’t knock the economy or markets off their path.
The biggest risk, given that strength, is that the expansion cycle has been much longer than usual, and the supporting trends are starting to decay. Still, based on history and current conditions, growth is likely to last through the end of the year.
While the risks are real, then, and growth will not last forever, the rest of 2017 looks likely to bring more of the same. More economic growth, slow but steady; more market appreciation, ditto; and more normalization across the board. After the turmoil in recent months and years, this is not a bad place to be.