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Why We Are Still Optimistic

Capitol Notes
by Greg Valliere
Horizon’s Chief Global Strategist

YESTERDAY WAS UGLY IN MANY RESPECTS. Our sense is that the pipe bomb terrorism will stoke passions on both sides of the political spectrum, but probably will not have a major impact on the Nov. 6 election. So we’ll focus this morning on the market selloff – and why optimism is still warranted.

THE GOOD NEWS:

GDP probably grew by 4 percent in the third quarter (we’ll get the number tomorrow).

GDP probably is growing by about 3-1/2 percent in the fourth quarter.

WAGES FINALLY have picked up; the private sector is hiking the minimum wage.

WORKERS HAVE MORE MONEY in their paychecks; consumer spending still looks solid.

THE LABOR MARKET is in the best shape in over a generation; anyone who wants a job can get one.

HOUSEHOLD NET WORTH is growing, along with the savings rate.

INFLATION and inflation expectations are still well contained.

CORPORATE EARNINGS may slide from spectacular to simply very good.

THE FEDERAL RESERVE may reconsider its pace of rate hikes in the wake of the market selloff.

A TRADE WAR WITH CHINA could shave only a couple tenths of a percent off GDP growth – hardly a disaster.

SLOW GROWTH IN CHINA may drive Beijing back to the bargaining table; a thaw is possible later this year.

AN UGLY TRADE WAR with Canada, Mexico and the EU apparently has been avoided.

THE U.S. BUDGET DEFICIT as a percentage of GDP is still manageable for another year or two.

THE U.S. ELECTION is unlikely to produce a market-rattling tidal wave.

EFFORTS TO KILL DONALD TRUMP’S ECONOMIC AGENDA will fail; his veto power looks solid.

HOUSE IMPEACHMENT IS POSSIBLE, Senate conviction is very unlikely.

THE GREATEST GEOPOLITICAL THREAT as this year begin – North Korea – has greatly diminished.

BOTTOM LINE: Obviously there are concerns; markets can always find a wall of worry. But our bottom line is that the euphoria genie – always a warning signal – is back in the bottle after this summer’s frothiness. A significant selloff was inevitable, and now expectations are more realistic. Some air has seeped out of the bubble, and that’s a good thing.

THE FUNDAMENTALS ARE STILL VERY GOOD: There’s enough stimulus in the pipeline for the economy to grow briskly – still not weighed down by significantly higher interest rates, which are remarkably low for this stage of the longest economic recovery in U.S. history.

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