It seems as though the first thing on everyone's mind when thinking about January 2017 is the inauguration of Donald Trump and the effect his first few weeks in office have already made globally. Trump's 17 executive orders have stirred reactions which have lifted the Dow Jones Index past 20,000 for the first time, and have simultaneously launched more protests in two weeks than it seems possible to count. Where will this new source of volatility lead us, and what does the resulting unpredictability really mean for your portfolio?
Trade and the US Dollar
President Trump's most impactful threat so far is the potential trade restrictions imposed on nations such as Mexico and China. His proposal for tariffs on imported goods would hurt American consumers and affect supply chains. Tariffs would also increase pressure on the US dollar as exporters' currencies would, in effect, devalue to partially offset the cost of the tariff.
A knock-on effect of a high dollar is that countries that have borrowed in USD (like many emerging economies) will have a harder time paying off their debt. On the other hand, countries that have lent the USD, like China, would benefit.
Trade wars would also have a significant effect on countries that rely heavily on US imports. Other countries, like China, who are starting to rely more and more on a growing consumer base, won't be as impacted. In China, less than 2% of firms rely on US imports to generate more than 10% of their business.
This may also cause countries to look for new markets to work with. Australia, for example, has recently tried to champion a re-written TPP that does not include the US. This may not pass, but it’s still a sign of the work-around countries are looking for.
Ignoring the current political issues, global fundamentals look quite strong. The US is as close to full employment as ever before, and the promise for infrastructure spending, lower regulation, and lower corporate taxes will drive profits and growth forecasts.
Affluence is growing in developing economies as years of globalized trade have created a new local consumer base rather than just relying on exports to the developed world.
Increasing inflation and a positive growth outlook in the EU are starting to build the debate for ending the ECB’s easing program. At the very least, risks of deflation are looking lower. This global growth is slowly shifting more global central banks away from monetary stimulus spending and turning their attention to strategies that compliment stability and growth.
Fundamentals or Speculation
So how do we make sense of the investment landscape in 2017? Will uncertainty and restrictive policies close doors, or will global fundamentals that are turning a positive page hold out? I think the answer is both; while fundamentals will be the underlying current that drives us forward, the river we’re on is by no means calm. The market will react to erratic changes of policy, but forward progress will eventually prevail. Increasing global wealth and improving productivity are forces that will inevitably inspire consumer confidence, bringing the market along with it. So, expect short-term volatility, but continue on the path ahead and focus on your long-term goals.