Where will 2019 take us?
There is absolutely no way to predict what will happen in the markets or the economy both here and around the world. But one thing is certain, all of that will be as unpredictable as the US government currently is. As we enter the third week of a partial government shutdown, that does not seem to be having either side back down it through even more uncertainty in the economy and the markets. This is an administration that simply does not know what it wants or how it can go about obtaining that or something similar. Like the markets, it goes up and down with no apparent pattern or end game in sight. But what does this and everything else have to do with the economy and the markets? Maybe everything or maybe nothing. That is the beauty of economies and stock markets all over the world. They are indeed connected yet distinctly separate.
The world it seems is on a roller coaster ride that no one wants to be on as it is not an enjoyable ride. First, we can look at what the government has done for and against the markets and economy. Yes, it is business friendly by reducing regulations that are imposed by the federal government making it easier to do business. But in many states and many of these businesses, there is a sense of moral obligation to the environment to adhere to them. While I am not going to get into the debate of climate change as everyone seems to have their ideas on the subject I do know that all but about three countries in the world are working towards reducing greenhouse emissions. Yes, the US has withdrawn from this pact in favor of the status quo, but many companies and states have elected to adhere to reducing these potentially harmful emissions. A move that I think will ultimately benefit the states and companies that have elected to adhere to the higher emission standards both here with, the younger generation and abroad where many of our larger firms derive their income. Sometimes business can do both be profitable and environmentally conscious, a win-win for everyone from customers to shareholders.
Business and the markets
Business’s earnings have increased for 2018 mainly due to the recent tax cuts and not necessarily due to a strong economy. Business and the markets do not like unpredictability, and the world economies are becoming unpredictable. Some of the reasons for that are due to natural economic cycles that occur regardless of any other actions. That could explain to a degree why the markets are acting in such a volatile manner. Or it could be the uncertainty of earnings for US-based companies that are largely dependent on foreign sales. And foreign sales are currently unpredictable due to the action of the government in the form of unsettled trade partnerships: the main one with China, the second largest economy in the world only to the US. Granted the US does indeed import much more from China than we export and I agree that something needs to be done about that fact, but a trade war with tariffs is not necessarily the answer. As China has almost four times as many people as the US it is an untapped opportunity for US companies and China does have a history of not respecting or enforcing US intellectual property and that is where the government does need to step in. But doing so at the cost of one the US’s main exports in farm products do not make sense at all.
And the tax cuts that were to make US corporations more competitive with foreign ones are enjoying the reduced tax rates that went into effect this year. But as many companies are seeing the reduced tax rates did enhance their earnings this past year but that will normalize going forward, and earnings most likely will not seem as good in the future. With the Chinese economy slowing down so will the rest of the world follow suit as a rule. And this will impact worldwide earnings of large US-based corporations as a result. And that will impact the US economy and in particular, the tax revenue that is generated in the US. Regardless of your thoughts on the role of the government in the economy the fact is the governments of the world spend huge sums of money on different projects all over the country and the world. And just as I thought when they passed the tax bill, corporations did not invest in employee pay or capital spending but rather elected to have any benefit aimed towards its shareholders.
Are we at the beginning of a bear market? Is this the beginning of a recession? I have no idea, but I do think that the volatility in the markets and the uncertainty in the economies around the world are here to stay at least for the foreseeable future. And until the government begins to act functionally and predictably, I am almost certain that the markets will remain volatile. And once that happens in the markets, the economies will follow suit and continue in their cycle continuing in decline or they will start a turnaround and get stronger.
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