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Economists,
executives and investors are reading the 2020 tea leaves with
heightened scrutiny in an effort to divine what this year holds for the
U.S. economy and for ordinary Americans. Here are the events they say
are most likely to impact and potentially reshape our economic
trajectory.
Economists
say if the 2020 election leads to a divided government like the current
one, little will change in a meaningful way for businesses and
investors. If a single party ends up controlling the White House and
both chambers of Congress, though, the economic impact could be greater.
“Equity
markets have traditionally performed better under Democrats than
Republicans when you average it out on a long-term basis, which defies
what most people believe are facts but… financial markets are terrified
of the far left wing of the Democratic party,” said Joseph Heider,
president of Cirrus Wealth Management. “If Elizabeth Warren or Bernie
Sanders look like they could be the nominee of the Democratic party, I
think that could have very negative impact on financial markets.”
Both
of these candidates’ pledges to rein in big companies and raise taxes
on corporations and the wealthy would hit banking, finance and tech
sectors — areas that buoyed indexes in 2019 — especially hard. “You
never know what would happen, but I don’t think that would be a positive
outcome for the financial markets,” said Heider.
“If
the Republicans take back the House and maintain control of the Senate
and we have a second term for President Donald Trump, I think we get a
second round of tax cuts,” said Brad McMillan, chief investment officer
for Commonwealth Financial Network.
He
argued, though, that a Democratic president and Congress wouldn’t be as
destabilizing as some market observers fear. “On one hand, taxes go up —
everyone assumes it’s going to kill the economy… but remember
government spending is also going to go up significantly,” he said.
“Net-net, it’s a much better result than people are thinking.”
Although the president announced on Tuesday that he would sign a phase one trade deal
between the U.S. and China at the White House on Jan. 15, this by no
means takes worries about tariffs and supply chain disruptions off the
table, experts say, especially with the U.S. withdrawing from large
multilateral agreements and ceding its position as de facto leader in
global trade.
“The
real thing that’s going to change the world over the next decade is the
U.S. is no longer the mainstay of the global free trading system,”
McMillan said.
“As
we look forward into 2020, I think the trade wars are either resolved
or they accelerate… we’ll have to see how that unfolds,” Heider said.
Although Great Britain is not a major trading partner of the U.S.,
Brexit also could be potentially disruptive, particularly if the country
leaves the European Union without a plan in place. “Those are both
unknowns,” he added.
A
number of market observers express doubt that the current truce between
the U.S. and China is more than a pause, and suggest that real or
threatened tariffs could continue to cast a chill on business investment
in 2020.
“I
wouldn’t be surprised if those tariffs came back into play,” said Dan
North, chief economist at Euler Hermes North America. If the White House
revisits its recently rescinded plan to levy sanctions on nearly all consumer goods coming from China, spending and confidence would drop. “That’s where it will hurt the economy,” North predicted.
In
the past, Trump has pulled back from nearly-complete trade deals over
the perception of being unfairly treated — and could very well do so
again, observers note.
“The
vast majority of the phase one is really centered on agriculture, but
the question remains, what’s the enforceability mechanism here? It’s
really unclear at this point,” said Lindsey Piegza, chief economist at
Stifel Fixed Income.
Beijing
has pledged to operate more fairly, but whether or not that promise is
kept remains to be seen, Piegza said. “They have time and time again
promised to crack down on that with no positive outcomes,” which could
derail the prospect of a more significant deal in the future.
Facebook’s
introduction of its Libra cryptocurrency platform is a shot across the
bow to gatekeepers of traditional financial and currency systems that
will continue to reverberate, said Lawrence White, an economics
professor at New York University’s Stern School of Business.
“We’ll only know in the next couple of years if it turns out to be a non-event, but the Facebook Libra announcement certainly attracted a great deal of attention,” he said.
Although lawmakers in the U.S. have broached regulations for cryptocurrency, and Switzerland’s finance minister recently declared that Libra had “failed,” White
maintained that cryptocurrencies are going to be a big topic of
interest — and regulatory scrutiny. He pointed out that people who
dismissed Libra’s antecedent as a passing fad were proven wrong.
“You
wouldn’t have seen the Facebook Libra announcement had there not been
the experience of and attention being paid to Bitcoin,” he said.
“Governments
are thinking, how do we regulate this? Should we be creating our own
digital currencies?” The existence, albeit nascent, of hundreds of other
would-be contenders in the space show that cryptocurrencies are going
to grow in both visibility and real financial impact, White predicted.
Many
economists hold the view that ultra-low interest rates have helped
propel the bull market into unprecedented territory, but that could
change in 2020.
“The
biggest risk to me is inflation, and that’s not a risk most people are
looking at. The CPI figures are starting to creep up a little more,”
said Mitchell Goldberg, president of ClientFirst Strategy. “I don’t know
if the Federal Reserve will be able to hold off if inflation rises.”
In spite of the president’s frequent complaints about his handpicked Fed Chairman Jerome Powell,
Goldberg said he expected Powell to respond to financial, not
political, signals. “I think eventually if Jerome Powell needs to raise
rates, he will,” he said.
This
has potentially market-shifting implications for highly leveraged
companies. “The corporate debt situation, because of where rates are, is
something we have to be mindful of,” said John Lynch, chief investment
strategist at LPL Financial. “You have half the Bloomberg Barclays
investment grade index literally a step away from junk.”
Because
interest rates are so low, companies have been able to take on debt
loads that would otherwise overwhelm them — which could happen if rates
rise, Lynch said.
This
could also create a downward spiral for indebted households, Piegza
said. “I don’t know if we ever got to the point where consumers really
cleaned off their household balance sheets enough. The way the U.S.
economy has grown out of recession is by the consumer taking on new
amounts of debt.” With corporate appetite for investment at a trough
thanks to uncertainty over trade issues, consumers are the primary force
still keeping the economy in drive. “Right now, we’re relying on the
consumer in terms of discretionary purchases but already we’re starting
to see some red flags,” she said. “This maybe a precarious position.”
Higher
interest rates also have implications for how much the U.S. Treasury —
in other words, taxpayers — pays to service the nation’s swelling debt
load.
“One
thing that’s remarkably forgotten at the moment is our fiscal situation
in terms of deficit and debt. Nobody wants to talk about that right
now,” North said. “If you look at the Congressional budget projections,
the debt-to-GDP ratio keeps creeping up. Nobody has plans to cut back on
the debt for all that money we’re borrowing.”
“I
view it like climate change,” said Mark Zandi, chief economist at
Moody’s Analytics. “We know it’s a problem if we don’t do something
about it. We don’t know precisely when it will be a problem or how it
will manifest itself. It’s a big deal. It’s just not a big deal today.”
Zandi
pointed out that the unpredictability of when, where and how this will
emerge as a headwind is precisely what makes it such an ominous threat.
“At some point down the road, it’s going to be something that’s going to
weigh very heavily on the economy. It’s corrosive. It’s going to wear
down the economy over time.”
Originally published at https://www.nbcnews.com on January 2, 2020.
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