LPL Midyear Outlook: Policy Focus

Policy gets a lot of real estate in our just-released Midyear Outlook 2019: FUNDAMENTAL: How to Focus on What Really Matters in the Markets. It’s no coincidence that policy is chapter one because it’s such a big part of the economic and market outlook for the second half of the year.

“We believe fiscal stimulus from the Tax Cuts and Jobs Act of 2017, along with decreased regulation and increased government spending, will continue to support the U.S. economy in 2019, and that the potential impact is both larger and more durable than consensus expectations,” noted LPL Chief Market Strategist John Lynch. “Unfortunately, whether the benefits of these fiscal measures fully materialize remains an open question due to trade uncertainty.”

As our LPL Chart of the Day, “Contribution of Fiscal Stimulus to Output”, shows, fiscal policy’s contribution to real gross domestic product (GDP) growth should be about 2.2% in 2019, higher than the 1.3% contribution in 2018.

Uncertainty around global trade may be discouraging productivity-enhancing capital investment. We believe self-interest will bring the United States and China back to the negotiating table, but until we see progress, trade tensions remain the primary risk to our forecasts. We hope some progress will be made this weekend when President Trump and President Xi are expected to talk at the G20 summit in Japan. Tariff decisions will be a key determinant of whether the U.S. economy can meet our lowered 2019 GDP growth forecast of 2.25 to 2.5 percent.

Policy is about more than fiscal measures and trade, however. With inflation low, global growth slowing, and trade risks still present, monetary policy may be too tight for the current environment.

For more of our thoughts on the role policy might play the rest of the year, please read our Midyear Outlook 2019. Also check out our latest LPL Market Signals podcast and Street View video. 

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This Research material was prepared by LPL Financial, LLC.

Please see the Midyear Outlook 2019: FUNDAMENTAL: How to Focus on What Really Matters in the Markets for additional description and disclosure.

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