What effect will rising rates and inflation likely have on the market? And what paradox is at play within the U.S. Economy? Read on to get our answers to these questions.
Fiscal Policy Could be Entering Uncharted Waters – we see an interesting paradox playing out in the U.S. economy today, that can be best understood in a historical context. In the past, and generally speaking, when the U.S. economy was in sustained growth mode and the debt burden was increasing, Congress responded by either raising taxes or cutting spending – or both. The rationale for doing so seems obvious – raise taxes to generate revenue needed to fight deficits, or cut spending to achieve the same outcome. Today, with the economy at near capacity and late in a growth cycle, federal fiscal policy and Congressional action in response has been precisely the opposite. Taxes have been lowered in a historic tax cut for U.S. corporations, and the federal government is spending more, not less. If the federal government had its way, spending would go up even more with big ticket items like infrastructure, the wall, and increased military spending. According to Goldman Sachs, the average maturity of U.S. debt is almost six years, so rising yields will take time before interest rates paid by the U.S. Treasury exceed the GDP growth rate. When that does happen, however, it could send the ratio of debt to GDP, which is already elevated today at 77%, even higher. Goldman estimates that the U.S. net interest expense relative to GDP will exceed the levels seen in the 1980s and early 1990s by 2027, and debt-to-GDP will probably be higher than 100%.
Tiptoeing Towards Trade War – the Trump administration this week received a green light for imposing steep tariffs on aluminum and steel imports from China, on the basis of national security and also in response to long running “dumping” accusations that have put downward pressure on prices. In response, China has threatened retaliation escalation to protect its own interests, which insinuated that they would respond with counter tariffs or other measures affecting trade costs. The Trump administration is yet to act on implementing new tariffs, so for now this is just a story worth watching closely. But if tariffs are levied and China responds, we will have to watch closely as the world’s two biggest economies escalate a scuttle on trade.
Bank of Japan: Pedal to the Metal – the current Bank of Japan Governor, Haruhiko Kuroda, was nominated to serve a second five-year term as the bank’s head. Known mostly for his aggressive and innovative approach to monetary easing, Kuroda would almost certainly, in our opinion, shepherd-in another five years of easy money. His nomination comes at a time when many of the world’s central banks are starting to slowly move towards the exits.
The Lost Art of the IPO – once the constant talk of Wall Street, initial public offerings (IPOs) are now resigned to the shadows. IPOs have fallen by nearly 50% since the late 1990s, and in an effort to revive enthusiasm for companies going public, the SEC is weighing a deregulatory move that would permit all companies to stage private talks with investors before announcing they will IPO. This measure could possibly help at the margin, but perhaps the real cause for flailing IPO enthusiasm is the seemingly endless amount of private capital available to finance start-ups. If a company like Uber can receive hundreds of millions of dollars without being beholden to shareholders, why go public?
The Greater the Focus on Rising Rates and Inflation, the Better – this is more of a Zacks Investment Management thought bubble than it is an actual news story. To investors, we would say, the more you hear about the perils of rising rates and inflation, and the less you hear about corporate earnings, the better. When good news gets buried and negative news is recycled nearly daily, in our view that tends to be a bullish sign.
Still, it can be hard to see through all the negative stories that overflow the news. For many investors, these stories can seem like information overload.
To help you manage the amount of information, we are offering readers a free Portfolio Stress Test.1
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