Time to Rethink the Financial Outlook for This Year – Introduction
Early this year, I penned an article on the United States and the economic implications. At the time, I looked at Trump’s new administration and saw the policies he wanted to implement. I then suggested that the economy and business will do very well. Now, I am changing my outlook.
Yes, the economy has improved significantly. The stock market is near an all-time high and investors have made a lot of money. However, risks are increasing every day. North Korea is testing its nuclear missiles. Donald Trump has failed to achieve a single policy matter, almost a year into his presidency. Dysfunction in Washington is very high and most Americans don’t trust their leaders.
The same risks are increasing in other places. In China, the economy is strengthening but not in the pace that I outlined in my article in January. In Europe, I never anticipated a re-election which was called by Theresa May. The ongoing Brexit negotiations are not progressing well with Britain’s team looking more dysfunctional. In the emerging markets, the countries are engulfed in huge political activities. For example, Jacob Zuma of South Africa has survived a vote of no confidence more than two times.
The stock market in the United States has done very well. The same is true in the stock markets of other developed countries. In Germany, United Kingdom, and other Asian countries, the markets have performed exceptionally well.
The first reason why I am changing my outlook for the year is because of the crisis in the Korean Peninsula. In January, I was optimistic because I believed Trump would use his business experience to negotiate a deal with North Koreans. I also expected him to hire experienced professionals who would help the country negotiate a good and lasting solution in the peninsula. However, what we are seeing now is not what we expected. Trump has failed to negotiate a deal. He has also continued to isolate himself which makes making a deal impossible.
The second reason is that the Fed has not normalized the interest rates as I expected. Early this year, the indication was that the Fed would normalize about four times. However, I believe that will not be the case. Inflation is significantly low and the political and geopolitical risks are increasing. The dollar has continued to weaken against the major currencies. This, coupled with the hurricane Harvey that recently happened will not be a good indicator of more rate hikes. Therefore, I believe that the federal reserve will not hike rates more time which could have significant impacts on the markets.
Third, there is the issue of crude oil. As I have mentioned before, crude oil is the most important resource in the world. Early this year, my projections was that the crude oil would rise as OPEC countries moved to reduce their outputs. However, oil has traded at a range of between $45 to $56. This seems to be a new normal in the oil markets. Therefore, I believe that the oil price will end the year at this range, and not between the $70 to $80 range I suggested.
Gold is an important commodity this year. It has gained significantly as more risks in the markets have increased. For sure, although I recommended owning gold for years, I did not expect it to gain the way it has today. The same is true for bitcoin and other cryptocurrencies which have gained significantly this year.