Published by Taylor Financial Group
This week was a big week for two reasons. First, the Federal Reserve (Fed) has finally been able to follow through on its projected rate hike path, including the second hike for 2017 announced at the conclusion of the Federal Open Market Committee’s June 13-14 meeting. This move highlights that the Fed increasingly trusts that the economy is on more solid footing and has largely met its dual mandate of 2% inflation and full employment. But, second, and of perhaps even greater importance, the Republicans put forth a health care act (and tax reductions) that may provide additional relief to the consumer.
The Fed will still have its role to play, but monetary policy is powering down as the driver of financial market strength. It is important for investors to appreciate that despite rising interest rates, U.S. equity indexes managed to progress through the first half of 2017 either at, or very near, all-time highs. Indeed, rising interest rates, alone, have not been enough historically to deter a market advance, especially when interest rates start as low as they are. Instead, all eyes will be on Washington regarding health care and tax reform along with infrastructure spending.
As political distractions have periodically surfaced, anticipation of a full transfer away from monetary policy has diminished and stock market leadership has at times turned away from those areas best positioned to benefit from tax relief. While the latest delays could push some key fiscal policy initiatives into 2018, the odds still favor tax reform ultimately being achieved, along with progress on deregulation and potentially infrastructure at a later date. All of these things would be a positive for the economy.
What are the implications of tax relief as a new market driver? Much like a portfolio can benefit from diversification, the economy and markets can benefit from different drivers working at different times. If we have shifted to new market dynamics, including a greater role for lower taxes, higher confidence, and stronger corporate profits, understanding the evolving opportunities will be important for diversified investors. For example, it could allow for market leaders beyond technology and health care, once confidence in the economy and markets expand.
For more information, check out the LPL Midyear Outlook: A Shift In Market Control and the LPL Midyear Outlook 2017: Executive Summary.
As always, if you have any questions or would like to make an appointment to discuss your investments, we encourage you to contact us.
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LPL Financial Midyear Outlook
This material is for general information only and is not intended to provide specific advice or recommendations for any individual. To determine what is appropriate for you, consult a qualified professional.
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