The economics of geopolitics
Trade war escalation and stalled Brexit negotiations have boosted investment risk and market volatility. Our panelists discussed the geopolitical landscape and how it's influencing investment decisions.
Despite uncertainty about trade and signs of global weakening, the U.S. economy remains healthy and is now in the longest economic expansion in U.S. history. We believe the underlying fundamentals — a robust job market, rising wages and low inflation — support continued growth during the rest of 2019. However, U.S. trade policy remains a wildcard and poses a major threat to the current expansion.
U.S. business confidence has been more mixed. Surveys that focus on larger companies have begun to show increasing concerns about future business trends and capital spending plans, likely in response to the trade uncertainty between the U.S. and China. According to the Small Business Optimism Index, confidence among “Main Street” owners remains elevated, but has weakened from its highs. In addition, finding quality workers is as great concern to small business as trade turmoil, and for good reason. The U.S. unemployment rate is the lowest in nearly 50 years at 3.6% as of June 30.
Source: Ivy Investments. Chart shows 2018, 2019 forecasts of annual gross domestic product (GDP) growth, all based on purchasing power parity. Past performance is not a guarantee of future results. The GDP growth forecasts are current through July 2019, and are subject change at any time based on market and other conditions. No forecasts can be guaranteed.
Over the last three years, U.S. consumer spending has steadily grown at 2.5–3%. While consumer confidence readings have been mixed, they have generally been healthy. But trade remains a key risk. If we’re wrong and the U.S. imposes tariffs on all Chinese imports that do not have tariffs, we will become more concerned about a possible recession in the U.S. and globally. Unlike most of the Chinese products that have had tariffs imposed, the remaining imports are mostly consumer facing. Those would have a more immediate effect on the purchasing power of the U.S. consumer, putting an important economic growth factor in jeopardy.
Source: Ivy Investments analysis of U.S. Federal Reserve regional surveys. Data show % change year to year of capital spending expectations and actual equipment spending.
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The opinions expressed are those of Ivy Investment Management Company and are not meant as investment advice or to predict or project the future performance of any investment product. The opinions are current through July 2019, are subject to change at any time based on market and other current conditions, and no forecasts can be guaranteed. This commentary is being provided as a general source of information and is not intended as a recommendation to purchase, sell, or hold any specific security or to engage in any investment strategy. Investment decisions should always be made based on an investor’s specific objectives, financial needs, risk tolerance and time horizon.