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Economic Observations Presentation



Covington recently presented their observations on the market and economy at our annual shooting event held at Pike Run Country Club. Please find our presentation commentary below.

The economy’s recent performance is real and is supported by sound economic fundamentals.  GDP growth is shifting from Obama’s anemic growth rate of 1.8% to 3+% in the last two quarters. This growth rate of 3+% back to back quarters has not happened for over ten years. While GDP for 2016 will come in around 2.2% this year, 2018 is looking good as well with a projected growth rate of 2.6%.  Global GDP is at 3.6%.  The economy is continuing to expand and by definition a recession is declared when we experience three negative quarters of GDP so this bull market cycle continues.

The roll back of regulations by President Trump has business confidence soaring.  Companies are spending again on capital investments.  Consumers are spending.  Hiring is reaching full employment.  We now see, according to the Bureau of Labor Statistics, 150 million people on payrolls and wage inflation of 2.8% which is making for fatter paychecks and more spending.  The global economic picture is improving for the first time in years; most major economies are expanding creating more demand for US made goods under a weakening dollar.  Additionally, operating income on the S&P 500 this year has gone from $101 per share to $118 per share YTD – a 16.8% growth rate.  Operating earnings are projected at year end 2017 to be $125 per share, another 6%.  The upside is that we will see 2017 operating earnings growth of 23%.  Corporate profit growth was to be 1.20%.  It hit 5% in the third quarter of 2017; it is expected to grow 8% in 2018.

So I think 2018 should be another good year for us supported by housing starts which is projected to grow as well at 5%.  Financial firms are poised to do well under rising interest rates making lending more profitable and with the strengthening commodity prices, energy funds will have the largest rebound in earnings.

Looking at the big Macro Economic picture all of us are about to be swept up by changes brought on by the fourth industrial revolution.  The first, as you know, was powered by the steam engine which moved us from an agriculture society to an urban based society.  The second, powered by electricity, ushered in mass production lowering costs dramatically and created our culture of consumerism.  The third was driven by computers and the internet.  It shifted the economy from manufacturing into services.  The current revolution under way is going to be driven by quantum mechanics.  All current computers process data in a linear sequence of ones and zeros.  But a quantum bit can be a zero and a one at the same time and do two computations at once.  The computing power is exponential and will allow quantum computers of the future to solve problems thousands of times as fast as today’s fastest supercomputer.  These spectacular advances are powered by Moore’s law that the number of components per integrated circuit doubles every year.  I know it isn’t easy to wrap your head around this, but the potential impact of quantum mechanics will result in exponential growth in our global economy impacting most notably healthcare, energy, industrial production, communications, how we drive, live and work through artificial intelligence.

Certainly there are things to be worried about that might disrupt this bull market cycle and I do think a disruption could come from bad policies and/or a geopolitical event such as war with Korea.

  • The tax bill is not a done deal
  • The budget hasn’t been passed – the House approved but the senate has not yet

  • Tax bill deficit is projected to be $1.5T -  a plus for corporations but not for individuals

  • The budget deficit was $630B up 18% last fiscal year

  • $1.5T tax cut cost/no one is even talking about entitlements or cutting the cost of COLA’s/new budget $70B+; more spending in new budget especially for defense

  • Regarding the “Fed” – if it ain’t broken don’t fix it; higher interest rates could kill this bull market cycle under a non-economist new Fed Chair

  • Trade protectionism (bad).  Trump wants to kill NAFTA and TAP

    China and Russia will gladly step in to fill those opportunities

  • Both parties have serious problems; Republicans are in an absolute civil war; more indictments; and talk of impeachment of Trump;

  • The Democrats; no new ideas just old ideas and old people (Bernie Sanders and Joe Biden want to run for President)

  • The GEO Politics situation is serious

    • Korea – 20% possibility of war; American war plans will be completed within 24 hours but at what cost in lives; 2M dead in Seoul?

    • What’s going on in the Middle East is also creating instability in the world

    • Iran – Shiites vs Sunnis and Saudi Arabia/Kurds are troubling and substantial developments that will challenge the status quo

    • And this administration is pushing for a “Palestinian State”?

So at this point I am reflective of Sir John Templeton’s thoughts on Bull Markets:   

“Bull markets are born on pessimism, grow on skepticism; mature on optimism and dies on euphoria.”

“This bull market was born on despair, grew on disbelief, is maturing on skepticism and may die on acceptance” – Liz Ann Sonders


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301 E. Main Street
Ligonier, PA 15658
Phone: 724-238-0151
Fax: 724-238-0148