Steve Stotts 
Director, Alternative Market Solutions, Miles Capital 

Why has the U.S. stock market been doing so well, and what is your expectation for 2018?
The U.S. stock market returned over 20 percent in 2017, far exceeding expectations set at the beginning of last year. Perhaps more remarkably, the S&P 500 index had a positive return in every single month for the first time on record. This was due to a combination of global growth, positive corporate earnings and low volatility.
     
The U.S. recovered from the financial crisis faster than other countries, but in 2017 the rest of the world started catching up. All 45 countries of the OECD (Organization for Economic Cooperation and Development) are on pace to grow in 2017, with 33 likely to accelerate from 2016.

The 2017 estimated earnings growth for the companies in the S&P 500 is 9.6 percent, which would be the highest since 2011. And companies with higher global exposure reported significantly better earnings in 2017, again pointing to the positive growth globally and its impact on U.S. markets.

Volatility was also exceptionally low in the equity markets in 2017. For the S&P 500, there were only eight 1 percent movements for the entire year. Additionally, there has not been a decline of at least 3 percent since November 2016, which again is the longest streak on record. In 2017, most negative news seemed to be anticipated or dismissed by the market, and very few headline challenges brought volatility.

We are cautiously optimistic for continued equity strength in 2018. While strong appreciation and valuations are slightly concerning, the supporting factors for these gains — global growth, solid earnings, low inflation, cheap credit and low interest rates — are likely to continue into 2018. The global economy is expected to continue growing in 2018. Earnings projections call for growth to reach double digits, continuing the trends from 2017. Tax reform should provide a tailwind for equities. And longer-term interest rates remain stubbornly low.

Geopolitical risks, midterm elections, an overheating economy and stretched valuations could create turbulence in the markets. We do expect to see more regular market patterns with some market pullbacks, which could be exacerbated by investors exiting large positions in already crowded trades.

Briefly, what’s one threat to the economy that you are keeping a watchful eye on, and why?
Central bank policy.

Synchronized global growth could increase the potential for inflation. How global central banks navigate removing accommodation, including the unprecedented unwinding of quantitative easing, is crucial. Moving too fast risks choking economies and confidence. Moving too slow risks higher inflation and more aggressive removal of accommodation down the road.

Chad Hart
extension economist, Iowa State University

What changes do you expect in commodity prices in 2018, and how will that affect Iowa’s economy?
Given the current structure of agricultural demands and assuming a “near normal” production year, commodity prices in 2018 will be very similar to those we have seen in 2017. U.S. agriculture has been on an amazing productivity run. The livestock industry has grown to produce over 100 billion pounds of meat per year. Crop producers have raised the five largest corn crops and four largest soybean crops in the past five years. At the same time, demand for agricultural products continues to rise with the growing world population and rising incomes in many areas of the world. The issue in many agricultural markets is that the supply increase has been more than enough to meet the demand, resulting in building inventories and lower prices. 
 
Those trends are likely to continue in 2018. The livestock sector is projected to grow by roughly 3 percent in 2018. Corn and soybean planting areas are projected to rise slightly in 2018. These moves set the stage for another round of strong agricultural production. And for the most part, agricultural demands are projected to rise as well. The growth in the livestock sector translates into increasing feed usage for the crop markets. Biofuels continue to expand their reach in the transportation fuel market. The wildcard on the demand will be international demand (exports). Current projections for 2018 show higher meat and soybean exports, but lower corn exports in 2018. Without some additional demand coming from international markets, supplies will again exceed demand and lower prices will continue to pressure the agricultural economy. Since agriculture remains a substantial portion of Iowa’s economic portfolio, the lower prices will also be a continuing drag on the state economy.
 
Briefly, what’s one threat to the economy that you are keeping a watchful eye on, and why?
The potential disruption of trade if the renegotiation of trade agreements goes poorly. International trade is a major component for Iowa agriculture. Depending on the commodity, 10 percent to 50 percent of our production is destined for consumption in other countries. Given our large agricultural supplies, we need every market we can access.

Eric Lohmeier 
president, NCP Inc.

What do you see in the merger and acquisition market for 2018?
You’re going to hear this from everybody you ask, which gives me pause to be so aligned with “consensus,” but our crystal ball (which has a warranty of about six months) is for more of the same. By that I mean a continuation of the trends from the last few years — globally 2017 was the fourth year straight of M&A exceeding $3 trillion. Volume has been even better in the middle market, which is a better indicator for the Midwest. 2017 was a record year, as opposed to a slight comedown in large company M&A. This aligns almost exactly with what our business has experienced; the last three years have all been as good or better than our prior record in 2007. 

Pricing was also at a record for 2017, as easy borrowing terms, low rates and a dearth of organic growth drivers continue to drive pricing for quality acquisition targets. Everyone in our industry is busy and expanding, which bodes well for the first half of 2018 — competitive and extremely attractive for the sellers, while buyers and their wall of liquidity (both private equity and strategic) have to hold their nose and pay up, along with lenders and their continually loosening loan standards. 

All of this gives me pause, and my one outside-of-consensus thought is that we will face a more challenging environment in the latter half of 2018, which will be driven either by a “black swan” type of event, or more likely the increasing interest rate environment. Our restructuring practice (workouts) has been virtually dormant for more than four years (a good thing), but we have recently seen a small number of (higher-profile) companies looking to secure funds because they had over-invested and/or got aggressive on expansion via leverage, and short maturities are both getting more expensive and coming due. I don’t think this will end anything like 2008, but I am starting to believe that 2017 will have marked an official top of the spectacular bull run in M&A for this cycle.
  
Briefly, what’s one threat to the economy that you are keeping a watchful eye on, and why?
I know a lot of folks will speculate about the questionable mental capacity of a sitting president, the dire budget picture in our own state or the potential for a “wave” election, but in our world this is fairly pointless conjecture best left for the cable networks when it comes to the near-term economic picture. I am laser-focused on a bubbling inflationary environment, low unemployment and difficulties throughout all of our client industry segments, filling job openings seems to indicate a wage push inflation scenario, which can be very difficult to contain — historically this has meant a more aggressive stance on interest rate increases. After more than 10 years of ever-decreasing to stable rates, the market still hasn’t really broken out on the longer end of the interest rate curve (10-year spreads to two-year are at historically low levels), which I think is giving businesses and investors a false sense of “Goldilocks” security. But the proverbial tide may be going out, and it will be a very volatile environment when we see who was swimming naked. Increasing interest rates will bite the commercial real estate industry first, and this should be followed by the commercial and industrial companies, most of which are very short in the duration of liabilities (debt) which leads to higher refinancing costs or worse; not good for valuations in almost any respect. Commercial banks could do pretty well here if this doesn’t lead to a deep recession as their own business and profit margins (via lending spreads) improve.

Ernie Goss
MacAllister Chair and economics professor, Creighton University
 
Are there any segments of Iowa’s economy that seem worrisome, looking to 2018? Any segments overheated?
 When Charles Dickens penned that “it was the best of times, it was the worst of times,” he could, with a bit of exaggeration, well have been alluding to Iowa’s economy over the past two years with rural areas, heavily dependent on agriculture, struggling and urban areas, tied to an expanding national economy, booming. For example, the latest U.S. Bureau of Economic Analysis income data show that between 2013 and 2017, Iowa’s farm economy slumped by 22.4 percent, while the rest of the Iowa economy expanded by 19.2 percent. 
 
Since 2006, Creighton University has conducted two monthly surveys of businesses and banks in the Midwest — one based on responses from bank CEOs in rural areas of 10 states, and one centered on surveys of manufacturing supply managers primarily in urban areas of nine states. Both surveys include Iowa, and have consistently indicated that rural areas of the state have suffered from four straight years of weakening agriculture commodity prices and declining farm income. On the other hand, manufacturing in Iowa and the U.S. is surging, economically speaking, with our monthly survey pointing to improving growth for 2018.
 
Looking ahead to 2018, the 2017 tax reform plan, which provides for the immediate write-off of plant and equipment purchases, will stimulate both agriculture and manufacturing sectors in Iowa. However, the bellicose tone of the Trump administration toward trade and the potential abolition of the North American Free Trade Agreement (NAFTA) is a real threat to the Iowa economy, particularly the state’s agriculture sector. In 2016, businesses and farms in Iowa exported $5.6 billion in goods to Canada and Mexico, supporting more than 33,000 jobs in the state. Among the 10 states that Creighton surveys each month, Iowa is second only to North Dakota in terms of dependence on NAFTA sales, at 3 percent of (gross domestic product). Trade is not a zero-sum game; all parties — Canada, Mexico and the U.S. — benefit from NAFTA. To paraphrase Robert Frost, before you build a wall, you better find out what you are walling in and walling out.
 
Why?
The top two threats to the Iowa economy are mounting trade restrictions and rising inflation. This spring there is the potential that NAFTA talks will be permanently halted with likely trade restrictions, tariffs, and even embargoes to follow. This would be very costly for the Iowa economy with the potential loss of $5.6 billion in the sale goods to Canada and Mexico, supporting more than 33,000 jobs in the state. Rising inflation represents the second great threat to the Iowa and U.S. economy. Should the nation’s inflation rate rise to its annual average between 1988 and the 2008 recession, the Federal Reserve would likely raise interest rates by as much as 2 percentage points, slowing economic growth substantially over the level currently expected.

Bob Baur 
Chief global economist, Principal Global Investors
 
What are the best and worst things that the Trump administration could do to fuel economic growth? 
From June 2009 when the last recession ended through December 2016, the U.S. economy (inflation-adjusted or real gross domestic product) grew at an annual pace of 2.2 percent; real consumer spending and business investment rose at a 2.4 percent and 4.2 percent annual rate respectively. For 2017, those same three series are estimated to have expanded at a respective pace of 2.6 percent, 2.6 percent and 5.9 percent, fourth quarter over fourth quarter. Our estimates for those series in 2018 respectively are 3.0 percent, 2.7 percent and 6.0 percent. 
 
So, some of the best things the Trump administration could do to fuel economic growth must be already happening or have been in prospect for some time: reforming U.S. business taxation so its rates and coverage are more competitive with the rest of the world; limiting the number of new regulations that burden business with significant costs; lifting some of the newer, more onerous regulations imposed over the last decade; allowing U.S. energy companies more areas for energy exploration. Small business confidence soared shortly after the November 2016 election and has remained at very high levels since; that confidence was likely from the expectation of these actions.
 
Another step to fuel growth might be in health care: Give consumers more choices; make insurance products and health care more responsive to those choices; allow health insurance to be sold across state lines; expand health savings accounts; equalize the tax treatment of health insurance costs for individuals who pay their own premiums versus those whose insurance is provided by their employer; set up state-subsidized high-risk pools. These steps could lower the overall cost of health care and allow the savings to be spent in more advantageous ways.
 
Taking significant steps to limit the opportunities for international trade would surely be a substantial negative for U.S. economic growth. Abrogating the North American Free Trade Agreement, pulling out of the World Trade Organization or unilaterally imposing sizable tariffs or other trade restrictions would likely create retaliatory taxation or trade constraints, which would reduce U.S. exports, cut U.S. growth and raise costs or curtail the supply of imported goods. However, working to improve reciprocity in trade relations might be detrimental in the short run but could improve export prospects in the long run.
  
Briefly, what’s one threat to the economy that you are keeping a watchful eye on, and why?
Long-term, the biggest threat is China’s aggressiveness in the South China Sea. Short-term, the biggest threat would be the potential for high U.S. tariffs or other import restrictions and the ensuing retaliation by U.S. trading partners.