With the first third of 2018 over, virtually all major world stock markets are in negative territory. While I think the business cycle has further to go, markets could be choppy at times as they work through these issues. The following is a list of questions about the U.S. economy that investors have been asking lately. They make up an economic “worry list” of sorts, and are worth reviewing.

 

Why is growth still sluggish? Q1 GDP growth of 2.3% was well below the 3.1% average of the prior three quarters. The largest tax cut package of all time was supposed to boost the economy. What happened? The economic benefits of tax cuts and other fiscal stimulus typically don’t materialize right away. They usually take at least a couple of quarters to kick in. There are signs growth could accelerate in the second half of the year, if not sooner. For example, during Q1 earnings conference calls, there was a pickup in small and medium-size business momentum.

 

Could inflation become a problem? This is certainly a risk the bond market has been focused on, and to a lesser extent, the stock market. First off, when we talk about “rising inflation,” we’re not talking about 1970s or early 1980s style high inflation. Wages are moving up, as are prices of commodities that are used as inputs for industrial products. Inflation rising back toward more normal levels after a lengthy period of ultralow inflation is likely to unfold. This would be positive, not negative, in my view. The Fed will allow core inflation to drift moderately above its 2% target, however, if inflation seems headed well beyond that level, look for the Fed to actively intervene with additional rate hikes. The uncertainty surrounding inflation’s ultimate stopping point could put financial markets on their heels at times.

 

Are you concerned about tariffs? The Trump administration’s tariff policies have the business sector and institutional investors on edge. It’s unclear how far the administration would go to implement a protectionist agenda and how trading partners would retaliate. Tariffs normally bring negative economic implications, but in my view the global economy is sturdy enough to absorb modest trade spats and targeted tariffs. I don’t think this will metastasize into an all-out trade war.

 

What about the flat yield curve—is a recession coming? Inverted, or negative yield curves are important indicators to watch. When the difference between 10- and 2-year yields turns negative, it is typically a sign a recession is coming in the next six or 12 months. Inversions matter most, and are the biggest threats to stock market performance because history shows that when a recession hits, corporate earnings plunge, and the equity bull market morphs into a bear market. The key takeaway is that an inverted yield curve (*which we do not have today) usually gives investors time to become defensive because a recession doesn’t automatically happen right away.

 

Conclusion: One of my mantras has been “to stay vigilant” when it comes to market risks, so it’ important to keep an eye on this list. I think the business cycle has further to go and the U.S. economy can keep growing for the next 12+ months, at least. But growth could be uneven or subpar, and the issues above could linger as headwinds for financial markets