As Trump officially takes office, many investors are wondering what our economic future will look like. Read on as we take a look at insights surrounding current investing news and the changing market landscape from free trade to the OPEC deal to indicators of the strength of the U.S. dollar…
In the Hotseat: Trade – free trade will be a ‘hot topic’ for the next few years. With the new administration’s tough talk on trade deals and protectionist ideas of taxing imports, trade will be center stage when assessing economic activity. This comes just at a time when China, the world’s second-largest economy, has seen trade sputter for the second year straight. In 2016, exports fell 7.7% and imports declined 5.5%, which resulted in an annual trade surplus of $510B. This marks a decline of 2015’s trade surplus of $594.5B. If the new administration labels China a currency manipulator and taxes imports, the problem could get worse and have a material impact on global economic growth. China’s President, Xi Jinping, actually had some sage words when discussing the matter of trade at the World Economic Forum in Davos this week. He said, “Protectionism is like locking oneself in a dark room,” and that, “No one will win a trade war.” He also compared the world economy to a “big ocean that you cannot escape from,” which when thought of in terms of supply chains, has some truth to it. The iPhone, for instance, relies on some 200 suppliers from all over the world.
Monitoring the OPEC Deal – Late last year, OPEC reached an agreement to cut the global production of oil by 1.2 million barrels per day. The agreement was set to take effect on January 1, so watchdogs are very curious whether there will be any follow-through. The price of a barrel of crude shot-up in the days following the announcement, so clearly markets are interested in the ultimate outcome. OPEC officials stated this week that in their view, 80% compliance would be good, with as low as 50% acceptable. While that is not exactly full follow-through, it should still be enough to placate markets and keep the price of oil steady. It appears at least for now that the supply glut issue is abating – the International Energy Agency said that oil stockpiles in the developed world fell for a fourth consecutive month in November, although they remained more than 300M barrels above the five-year average.
Key Indicators for the US Dollar – comments by Donald Trump that the dollar “was too strong” send the greenback tumbling, and all eyes have turned to the confirmation hearing of Steven Mnuchin for signals about policy ideas that could affect the dollar and interest rates. The dollar may undergo a sort of tug of war in the coming year. On the one hand, lowering corporate taxes and implementing fiscal spending programs could be inflationary, which tends to weaken the currency. On the other, a hawkish Fed that implements restrictive monetary policy to counter inflation could send the dollar the other way. With Europe and Japan continuing QE programs into the New Year, the latter scenario appears more likely.
Brexit Watch – British Prime Minister Theresa May gave a speech on Brexit this week, that appeared contradictory in many ways. She expressed a wish of a liberal, open future for Britain, using the slogan “A Global Britain.” This language insinuates the desire for free trade and more open borders, neither of which she is likely to get. She has set immigration control as her priority while insisting that Britain not be beholden to the jurisdiction of the European Court of Justice (ECJ). It is not evident that Britain has the leverage in these negotiations. To make matters more difficult, the financial industry appears to be hedging its bets on London’s future as a financial epicenter. Goldman Sachs is considering halving its London staff, and may move 1,000 workers to Frankfurt. Also this week, UBS said that about 1,000 of the bank’s 5,000 employees based in London may be affected by Brexit, while HSBC said it may relocate 1,000 staff to Paris.
With so many factors affecting the market, ultimately the question becomes—what is the overall state of our economy? We at Zacks Investment Management are always looking at hard data instead of getting caught up in the headlines to provide context for investing decisions. If you want an inside look at what we’re seeing, download our just- released Stock Market Outlook Report. Learn more by clicking on the link below.
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