Have You Noticed How Much China Is in the News Lately?

If we turn the calendar back to January and February 2016, the U.S. stock market saw one of its worst annual starts in history.  China, with the currency and stock market that was quickly moving downward, caused much of the setback in the United States markets.  This is because China’s enormity and its global economic importance have moved this country ahead of the United States in its influence over world markets.

This premise was confirmed when, later in the year, the U.S. market righted itself at the same time that the Chinese markets rebounded.

Recently, Capital Ideas shared the following information which I think you will find interesting:

By 2025, 4.2 billion people out of a global population of 7.9 billion will be part of the consuming class.

For the first time in history, the number of people with discretionary income will exceed the number of people still struggling to meet basic needs.

Here are some of the changes in consumer spending which is led by millennials:

• Chinese millennials are “all about the experience”.  This includes going to the movies and increasing their travel abroad.  They spend considerably on-line for lifestyle items.

• Another country positioned to benefit from the increased spending is India.  In the next 10 years, about 150 million new people will enter India’s workforce.  Highways, airports, and other infrastructure is expected to increase along with consumer spending.

• The 80 million American millennials spend at least $600 billion a year.  They are adding to the success of businesses like Uber and HomeAway.

Consumer spending drives 70% of the U.S. gross domestic product (GDP).

We will watch for new investment possibilities based on this information.

We welcome the opportunity to share a cup of coffee and conversation with you.

Barbara A. Culver
CFP®, ChFC®, CLU, AEP®
Resonate, Inc.
(513) 605-2500

Interestingly, a case can be made either way.

Because I prefer to end my blogs on a positive note, let’s first look at what might detract from or slow economic growth in 2017.

1.   The strengthening US dollar.  Since the November 2016 election, the dollar is up 4%.  It is predicted to increase by another 5% this year.  (Source: Kiplinger Letter 1-13-17)
Anyone want to go to Europe?

2.   Gradually rising interest rates.  This could impact sensitive sectors such as housing and auto sales.

3.   The uncertainty of trade wars.  If the president makes good on campaign promises, countries could retaliate by buying less U.S. goods.  Punitive tariffs are also a possibility.

Now let’s consider the positives.

(The source of the following is BNY Mellon Weekly Fixed Income Market Commentary December 7, 2016, Investing Haven “Bond Market Outlook for 2017”: “Investment Outlook” Bill Gross, Janus Capital Group.)

There are currently two key drivers of the market.  One is the election of Donald Trump, and the other is central banks.  The banks are significant, because they are the largest holders in the debt market.

From the U.S.:  Interest rates increased one-quarter of one percent to 0.75% in December 2016.

From Europe: We expect the ECB to extend the current Quantitative Easing buying program.  (The ECB is currently buying 80 billion euros per month.  The expiration date is March, 2017.)

Why is this important?  It is important because increasing interest rates impact stocks, gold, commodities, and currencies.  Based on recent signs, rising rates have a negative impact on gold and a positive influence on the dollar and financial stocks.

As we work to define the impact in 2017, we will be watching the 20 year bond market (TLT) and what happens to other sectors when the TLT reaches amounts around the $120 level.   TLT is an Exchange Traded Fund (ETF) that tracks the 20 year Treasury.

(Credit goes to Michelle Borre CFA, Oppenheimer Funds; “Will Trumponomics Bring a New Interest Rate Regime?” and Scott Page CFA and Craig Russ Co-Directors of Bank Loans at Eaton Vance “Fed Delivers Continued Tailwind for Floating Rate Loan Investors”.)

None of the information below is to be considered a recommendation to buy, hold or sell any particular position.

The following stated goals from President Elect Trump could bring sweeping change to some long-held market views on interest rates:

1. Fiscal stimulus in the form of corporate and individual tax cuts;
2. Incentives to bring offshore cash back on shore;
3. Increased infrastructure spending;
4. Tariffs or taxes on imported goods which still cause these goods to be more expensive to purchase.