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U.S. GDP Growth Surprise

In this week’s news affecting your wealth, the U.S economy grew 3% in the third quarter, much faster than had been expected. The consensus forecast of 59 economists, surveyed by The Wall Street Journal in early October, had been for 2.7% growth. The 3% figure is an estimate and the final number could be revised in the weeks ahead.  For growth to hit 3% in the third quarter despite two severe hurricanes, the threat of a nuclear war with North Korea, and political strife in Washington, D.C. is an impressive display of the current economic momentum.

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Meanwhile, the House of Representatives took a major step forward on enacting a massive $1.5 trillion tax cut, which will stimulate the already strong growth expected in 2018. The House narrowly approved a $746 billion federal budget for the government’s 2018 fiscal year, increasing the deficit by $80 billion. Approval of the budget resolution clears the path to the massive tax cut, but the details of the tax cut remained far from clear.

The proposal calls for paying for the tax cuts largely by eliminating the deduction on state and local taxes, including property taxes. The budget was narrowly passed by a 212 to 216 vote in the House on Thursday, with 20 Republicans from high tax states voting against the resolution, alongside Democrats.

More Republican lawmakers in states with high income and property taxes may defect and vote against the tax cuts unless the final legislation softens the financial blow to their constituents. High income urban and suburban communities would be hardest hit under the proposal, and  it would increase deficit spending and weaken the balance sheet of the U.S. Government. Should the tax proposal be adopted, your current tax liability for 2017 could decline. This could require lastminute tax planning before the end of the year.

Lower taxes would put more money in consumers’ hands and boost spending in the economy, and the Standard & Poor’s 500 stock index, which has been breaking records for months, ended last week at a new all time high. A correction of 10% or 15%, due to a change in sentiment or some bad unexpected world
event, is always possible. And, as the eight and a half year bull market grows older, the likelihood of a bear market a drop of 20% or more increases. However, inflation is tame, job growth has been strong, and real growth in wages and disposable personal income are at record levels.

Despite the tripling in the value of the S&P 500 since bottoming in March of 2009 and the stream of good economic news, irrational exuberance is not an issue.The average price of a stock in the S&P 500 trades at 19.9 times its trailing 12 month earnings and 17.4 times the consensus bottom up forecast for 2018 earnings, according to Wall Street analysts’ consensus estimates. Investors have not bid stock prices beyond their historical valuation range. Despite some very troubling headlines, the economy keeps surprising on the upside, and the bull market could head much higher and run much longer.

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Market DataBank: 3Q 2019

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