Happy 4th of July, Wall Street. Now, brace for turbulence. Market watcher and political strategist Greg Valliere of Potomac Research Group says the chance the market will hit some “air pockets” in the second half of the year is rising.
Stocks have been on a tear in the first sixth months of the year, with the S&P repeatedly hitting new record highs and Dow 17,000 in the conversation. And by most, if not all, accounts the economy is now expanding, despite a sharp decline in first quarter GDP. More recent evidence – including strong reports on manufacturing activity and private sector job growth – points to accelerating economic growth. Valliere believes the 2.9% decline in GDP in the first quarter is “ancient history” and the economy is on track for stronger growth in the next three quarters. “I think we’re now going into a new glide path: 3% to 3-1/2% GDP,” he says. And “we had better, because I think stocks are priced for 3% to 3-1/2% GDP. I think that’s already in the market.”
Valliere says that while the fundamentals of the economy still look strong, there are three big potential trouble spots the markets will need to keep a close watch on in the second half of the year.
“Number one: policy uncertainty in Washington. There could be another budget crisis when the fiscal year ends on September 30th.
“Number Two: I think in the second half of this year, the Federal Reserve will start to debate - quite publicly and noisily – when they start to raise interest rates and that’s something the markets might not enjoy seeing.
“Number three: transcending everything is geopolitics and Iraq. I think this is a horrible civil war with no clear end game that’s going to keep energy prices quite high.”
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