E What Could Go Wrong?

The bull market is alive and well, a fact too easily overlooked amid the daily swings and news coverage about the happenings in Washington.  The media usually ignore good economic news.  Here’s some:  Wall Street economists expect second-quarter GDP to rise by four percent or more. 

I’ve written about the many positives that are affecting stock prices, primary earnings and interest rates.  The outlook is still good.  But it’s also best to be prepared for a bear market.  What can go wrong?

With other distractions dominating the headlines, few are talking about our deficit.  The U.S. federal budget deficit for fiscal year 2019 will be $985 billion.  That will add to the national debt, with the debt-to-GDP ratio at 80 percent and rising.  While not an issue now, it could become a problem during the next recession or financial crisis.  Plus, servicing the debt will become harder as interest rates rise.  The power of a nation isn’t just defined by the strength of its military.  Its economy may be even more important, as the Soviet Union showed in the 1980s.

Another wildcard in the otherwise very bullish outlook for the economy, earnings and stocks is the possibility that the current skirmishes and rhetoric over trade and tariffs could lead to something more serious.  Possible, of course, but not likely since that would be in no one's interest. 

By the way, while we all understand that deficits -- budget, trade or household -- are bad and not sustainable, their impact is not so clear.  There was a record trade deficit in 1984 and widespread concern about the danger of the "twin deficits" (the budget deficit being the other).  Did the deficits undermine the economy?  Hardly.  GDP grew 7.4 percent in 1984 and was up more than 4 percent the year before and 4 percent the year after with still large deficits.  Now the budget deficit is approaching $1 trillion and the trade deficit more than $700 billion.  And GDP growth?  Expected to be more than 3 percent this year, a far cry from the sub-two-percent pace going back to 2007.  

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Disclaimer: David Vomund is a fee-only money manager. Information is found at vomundinvestments.com or by calling 775-832-8555. Clients hold the ...

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