(photo credit: ING IMAGE/ASAP)
A broad economic expansion, strong earnings growth, low interest rates despite a moderate pace of monetary tightening appear to provide a favorable environment for global financial markets for the remainder of 2018. However, a range of economic and policy risks — including the outcome of the serious trade protectionism — create the potential for renewed volatility. US President Donald Trump’s controversial regulatory reforms and tax cuts have spurred the economy forward by all relevant metrics, and unemployment has reached record lows for black, Hispanic and Asian Americans and for Americans with disabilities. Overall, the International Monetary Fund expects global GDP growth to hit 3.9% in 2018 — the fastest rate since 2011. Moreover, the IMF says the global recovery is the broadest in seven years, with growth picking up in countries accounting for three-quarters of world output. That growth is supported by accommodative financial conditions globally and expansionary fiscal policy in the United States.
For those panicking about the trade wars, it is worth keeping in mind that only about 15% of the US economy depends on foreign trade. Even with a tariff war under way, there will be many companies that make enormous profits as a result of protectionism. In addition, many of the products affected are fungible so that, in theory, China might now buy its soybeans from South American growers, with US growers then supplying former South American customers. It’s not simply a catastrophic losing game for everyone.
Here are the key aspects of the current scenario: 1. The global economy is on a synchronized growth track, led by the US. Emerging markets present an extraordinary long-term opportunity for corporate profits as millions of people become consumers for the first time and enter the middle class, although there is far more volatility in this category. With manufacturing, consumer TRumP Economy By David Zwebner & Selwyn Gerber Left to right: David Zwebner, Selwyn Gerber (Photos courtesy Commstock) sentiment and other indicators mostly on the upswing, expansion is gaining traction in many of the countries driving global growth. Although some countries, such as Japan, are showing signs of slowing, the wider global growth trend appears to still be firmly in place.
2. Trump-era tax cuts are enabling companies to retain more of their profits to reinvest or to distribute; and lower taxes on repatriation of foreign earnings release significant additional capital to US-based companies.
3. The integration of the digital revolution into every aspect of our lives mirrors in many respects what happened 100 years ago when electricity transformed almost everything. The efficiencies in terms of productivity and the profitable creation of new products and services are incalculable and are in large measure responsible for the benign inflation that is evident in almost every country.
4. Skepticism abounds in the punditry. Positive outlooks are harder to find, even though they have been largely correct recently. Bulls are keeping the faith, arguing that underlying fundamentals — and perhaps the political calendar — point the way higher.
Whereas the 20th century was defined by a phenomenal rise in the transfer of goods and industrial commodities, the 21st century is being characterized by the rapid digitization of services. Innovative technology platforms are facilitating this digital trade. Moreover, the movement is not easily captured in traditional trade metrics or controlled by government regulations and is impacting every aspect of the economy in much the same way that the introduction of electricity did a century ago. Results of the S&P 500 were extremely strong: Sales grew 11%, earnings rose 27%, and profit margins expanded to a new all-time high of 11.4%.
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Companies that are shining in the era of digital trade include Alphabet (Google), which, along with Facebook, dominates the online advertising space; Amazon, which is radically disrupting both retail shopping and cloud-based hosting services; and Priceline, the largest online travel agency in the world. In their own market, several Chinese Internet companies are just as dominant, including Alibaba and Tencent, marking a clear line between winners and losers in the digital age. In fact, digital technology has facilitated the development of the largest hotel chain equivalent in the world without laying a brick — known as Airbnb; and similarly, the world’s largest taxi fleets — Uber and Lyft — evolved without buying a single vehicle. While there are many reasons to be concerned about the global political/ economic headwinds, the fundamental elements are solidly in place, and it is likely that the momentum will enable all established markets, especially the US, to continue on the current growth path, with volatility along the way up. David Zwebner is the president of Commstock Financial Consultants. Selwyn Gerber, CPA, is a founding member of RVW Wealth LLC
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