Trends in business and public sectors to watch for in the 2nd half of 2018.
Before school and before professional and college football starts up again it is a good time to look at some trends that are emerging as we head into the last quarter of the calendar year. These trends will have broad impacts to both the public and private sectors. How the stock market, individual companies, and the U.S. government will react are of interest to everyone but especially to policy wonks and news junkies.
Trade Wars- Something to monitor in terms of cost and how it affects the average consumer. Based on the latest comments in the news and the $200 billion more in tariffs it looks like the trade war is on with potential for more.
Many businesses in this week conference calls have said they will start to raise prices because of the increase in input material, Coca-Cola being the latest example. The secondary impact is the trade wars impact on the GDP growth and increasing chances tariffs nullifying the in increase cash flow to Americans benefiting from the tax break, although as an April CRS report states.
“There is no overall consensus on the impact of trade and trade agreements on wages of U.S. workers (which have been relatively stagnant for decades) and income inequality in the United States (which has also deepened). Many studies have found that other factors, such as technological change, have had a significantly larger impact on relative wages.”
So the impact to the average consumer is negligible historically, but the world’s supply chains are more diverse, geographical dispersed, and most importantly integrated than any time previously, so that may change, and an interesting data point to consider is this graph from the FRED and the divergence between incomes of the individual and the incomes of business.
What is causing the divergence between corporate profits and personal income is for another post, but divergence in the graph following the Great Recession indicates something fundamental changed, and it was not trade. So this time around the disparity demonstrated above may be impacted by tariffs than any previous trade war.
Where the trade war goes from here is anyone’s guess but the next move in this game of chess belongs to the Chinese. How this plays out and how it shows up in balance of personal check books will something to track on public opinion about the trade wars but also mid-term elections.
The mid-term elections. This won’t have any appreciable affect until early 2019 however, the run-up to the mid-terms and its aftermath could be bloody, bruised, and bitter. What may make this event relevant prior to the actual elections is if there is more meddling from foreign actors, which Facebook’s recent press release indicate there is something afoot. How the public and government responds, either active, passively, or not at all, could spin dynamics in a directions similar to 2016, only more acrimonious. The critical thing to explore following the election is to work through any policy changes, which means watch what the cabinets members and congressional committees do and not the President. If you want to get caught in a vortex of activity with a lot of talk and not much action, follow the twitter-sphere.
A stock markets, bonds, and recession fears. This is a mid to long term trend that needs to be looked at but there are undercurrents that could spell trouble for one, if not both stocks and bonds. As the President of JP Morgan has said recently, the unwinding of the quantitative easing (QE) by The Fed has the stock market in uncharted territory. How that plays out is unknown, we have never been here before and when one adds the trade fears, combined with the general public discord increases the risks to the markets with more unknowns than known, a position money and hedge fund managers don’t like to be.
The market over the past month has struggled to find gains with a gain of 2.24% for the month, the majority of which has come from the tech stocks of Facebook, Amazon, Netflix, and Alphabet (FAANG). So gains narrowed to a specific sector combined with the unwinding of QE, and potential tariffs that could be implemented have consequences that are not totally understood as the Fed unwinds the QE in a stock market with more losers than gainers other than FAANG.
The international order will continue to evolve. From the trade war to the America first policy, places the world order of the last 70 years in flux. The trade wars will impact it but more importantly is will how nation states start to being to deliberately respond to the administration. World leaders have been perplexed by the change in tone from the leadership of the United States. Following the mid-term elections and into 2019 we will more likely than not see world leaders start to move and make agreements with nations and international organizations that do not include the U.S.. The result of which is less of an ability to influence events or get what it wants of have U.S. interests protected/represented. It is also important to point out China’s moves in the international order and China’s heavy emphasis on it’s One Belt, One Road Program (OBOR) (see graphic below) combined with its expansion in the maritime domain is something that may slowly erode the U.S. economic and military hegemony in the out years. China is laying the ground work with economic agreements, exchanges and land use guarantees in such countries as Djibouti and the United Arab Emirates. So this is a story to pay attention to not only the rest of 2018 but also 2019.
How these shifting sands affect the American Citizen at the local level remains to be seen and will be something that the public and private sector leadership will have to communicate as topics like this are often confusing and difficult to see the connection in the lives of everyday citizens unless you are a policy or political wonk.
The Fall surprise- There is of course the fall surprise that is always to be on the look out for. In 2016 it was the FBI and Clinton Emails, in 2017 it was the natural disasters of Hurricane Harvey, Maria, and Irma. What will the fall surprise of 2018? That is the question that has everyone on the look out for. The first to identify it and adjust for the fall surprise stands to benefit the most.
We are in for an interesting time so pay attention and get ready, there is a Gordian Knot developing and how, when, where and why that Gordian Knot develops and how and if it is cut is the signal in the noise to be looking for.