Stocks hit a rough patch over the past couple of weeks, but fortunately, the fundamental economic picture remains strong.
Sparking this bout of uncertainty was the fear that inflation would force the Federal Reserve (Fed), our nation's central bank, to raise short-term interest rates quicker than Wall Street traders are expecting.
This led to large-company stocks briefly slipping into correction territory (a drop of 10%) last week. Stocks have since recovered somewhat from that decline, and it's possible we've seen the bottom. But Simply Money Advisors would not be surprised by a “retest” of those lows before stock prices head higher over the next year.
The reason we are optimistic on stocks, in the long run, is that the U.S. economy is growing with little risk of a recession. Historically, the largest stock market declines occurred when there was a risk of a recession.
Simply Money Advisors expects the U.S. economy to grow around 2.5% in 2018. This economic growth, combined with tax reform, should result in corporate profits growing around 15% on average in 2018.
Currently, companies are reporting profits for the final quarter of 2017, and the results are strong. About 81% of large companies have reported better-than-expected profits, with year-over-year profit growth of nearly 16% on average.
The economy and corporate profits are the main driver of the stock market over the longer run. This week's economic calendar is packed with information that should give us an idea of how the economy is doing to start the year: inflation, retail sales, manufacturing, housing, and consumer sentiment.
Wall Street traders will be watching the inflation number closely for signs that prices are rising in the broad economy. The concern is that “core” inflation closes in on 2% and that forces the Fed to raise short-term interest rates more than three times in 2018.
The Simply Money Point
Simply Money Advisors believes the economy is still looking good, and that the Fed will raise short-term interest rates two or three times this year. If you have any debt that carries a variable interest rate, now is a good time to focus on paying off that debt.