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Economics
Take a deeper dive into the global repercussions of recent political events and explore the economic forces of inflation, wages, interest rates, taxes, unemployment, and national currencies and their potential effects on investors and policymakers, in the U.S. and around the world.
The debate among investors at the beginning of 2024 focused on how long the economy could sustain above trend growth and whether inflation would continue to decelerate. As we look ahead, most economists have lowered the likelihood of a recession this year considerably amid continued strong economic data, but risks to the bullish outlook remain.
One of the most important debates today relates to the potential impact that generative artificial intelligence (Gen AI) models will have on the U.S. labor market. Some observers see the ongoing process of automation as a harbinger for widespread layoffs, not only for low-skilled workers but also for more highly skilled professionals.
This issue of how effective sanctions are in dealing with recalcitrant nations is being discussed once again amid reports that Russia’s economy is faring better than expected two years after the U.S. and European Union imposed sweeping sanctions on it.
An inverted yield curve, in which yields on longer-dated bonds are below those for shorter-dated instruments, has correctly predicted the last nine U.S. recessions in the post-World War II era. However, this winning streak could be coming to an end, as the U.S. economy has displayed surprising resilience to the Federal Reserve’s tightening during the past two years.
With the U.S. economy performing surprisingly well and the stock market setting record highs, many investors call what is happening the "Goldilocks economy." The main concern now is geopolitical, with the possibility that the Israeli-Hamas conflict could spread throughout the Middle East. However, there is also the risk of a global trade conflict with China that is going unnoticed.
Expect the oil market to remain balanced in 2024 with oil in the low $70s, a level which could have a minor impact on non-OPEC growth. Midstream equities, under such a scenario, should experience some modest volume growth, while upstream producers could see lower cash flows relative to 2023.
What does the January jobs report mean for the strength of the economy and possible implications for the 2024 elections? And how does this impact the debate about whether the economy is headed for a recession?
Financial markets often surprise investors, but the past year defied virtually all forecasts. The prevailing view at the start of the year was that aggressive tightening by the Fed would produce a recession. Instead, economic growth far surpassed expectations at 2.6% according to Fed estimates.
As investors look ahead to 2024, the central concern on their minds is the extent to which the Federal Reserve will ease monetary policy in the new year.
The end of each year is usually a time for reflection about how the economy and markets fared, as well as for assessing future prospects. Normally, the assessments are a blend of both positive and negative considerations. 2023, however, was different.
In anticipation of the upcoming year, investors are eminently focused on a pivotal question: Are the Federal Reserve's interest rate hikes concluded, and is a rate reduction on the horizon for the next year? While interest rate expectations always matter, the gyrations of financial markets – stocks, bonds, and the dollar — have been dominated the past two years by expectations about what the Federal Reserve will do.
While global investors focus on the prospects for the U.S. and China, they should not overlook the euro zone, where the economic outlook has shifted this year. The initial consensus was that Europe would be adversely impacted due to its heavy reliance on Russian natural gas. Instead, the euro zone economy proved resilient, primarily because of unexpected plunges in natural gas prices and crude oil.
The Federal Reserve’s decision to leave interest rates unchanged at the recent Federal Open Market Committee meeting was widely expected, given Chair Jerome Powell and other officials previously signaled the outcome.
Investors have come to accept that the Fed will keep rates “higher for longer.” Meanwhile, prospects for a soft landing have improved as core inflation has come down significantly this year. Still, investors must assess whether the U.S. economy can stay resilient now that interest rates are positive in real terms and economies abroad are weakening.
As China's economy has struggled to gain traction this year, many investors accept that its economic growth rate will be below the government’s official target of 5%, which is reflected in a significant underperformance of China's stock market relative to the U.S. and other global peers in the past four months.
The U.S. economy’s performance this year has been an enigma for many people. Real GDP growth has been stronger than expected, while inflation has fallen more quickly than expected.
The first half of 2023 was full of surprises. Bond yields surged initially and then subsequently fell back in early April when several regional banks encountered problems. By midyear, however, yields had risen again as the economy proved resilient to Fed rate hikes. Meanwhile, the S&P 500 Index, which had fluctuated in a broad trading range since mid-2022, broke decidedly to the upside in the second quarter, reaching its highest level since April 2022.
A question often asked is, how long can the dollar retain its status as the world’s principal currency? There have been numerous occasions when commentators declared an end to the dollar’s dominance—only to be proven wrong.
World trade has slowed over the past five years due to tariffs imposed, supply chain disruptions, the Russian-Ukraine conflict, and, recently, U.S. export controls, which are intended to hinder Chinese advances in technology. The challenge for policymakers now is to find a way to ease tensions before fissures in the global trading system leave it divided.
The Fed is following its standard procedure of separating the conduct of monetary policy, which is geared to achieve low inflation and full employment, from regulatory policy that is intended to preserve financial stability. The view is that monetary policy should not be altered when a financial institution becomes insolvent unless it is systemically important. While this makes sense in theory, there are many gray areas in implementing policy.
The bond market experienced one of the most volatile quarters in history in the first quarter of 2023. There also remains uncertainty about how widespread issues are in the banking sector and how these could impact the economy as a whole. We believe that if a recession does transpire, it will be mild, as household and business balance sheets are strong.
Russia’s invasion of Ukraine caused not only a geopolitical earthquake but also a storm of uncertainty for U.S. investors and the global economy at large.
When President Biden assumed office two years ago, proponents of free trade hoped it would signal a break from President Trump’s protectionist stance. To the chagrin of many, Biden’s trade policy remains a mystery.
This question has surfaced in the wake of blockbuster jobs growth in January. Nonfarm payrolls increased by 517,000 and were accompanied by upward revisions in the two previous months, while the household survey posted nearly a 900,000 increase. They resulted in the unemployment rate falling to 3.4%, the lowest level since 1969. Is this a statistical fluke?
Shockwaves over the debacle to elect Kevin McCarthy (R-Calif.) House Speaker have dissipated by now, but the fallout over raising the federal debt ceiling is just beginning. How will this play out and how will it impact the economy?
2022 was one of the worst years for U.S. stocks and bonds, as inflation spiked to a four-decade high. Looking ahead, the key issue for investors is whether Fed tightening will spawn a U.S. recession. Fort Washington’s Senior Economic Advisor Nick Sargen shares a 2023 outlook for the economy and how we are positioning investment portfolios.
As 2023 gets underway, most forecasts for the global economy are downbeat as central banks combat inflation by raising interest rates. Among developed economies, Europe faces the worst predicament because it is also impacted by a squeeze in natural gas supplies from Russia.
In the wake of the 2022 midterm elections, many observers believe the most likely outcome for fiscal policy over the next two years will be gridlock. This comes after the Democrats enacted major spending programs in the past two years.
During the past year, investors have fixated on how pro-active the Federal Reserve was in tackling inflation. What will happen if the Fed does not retain its 2% inflation target in 2023?
Following China’s 20th Party Congress in mid-October, most experts’ assessments have been overwhelmingly negative. As was widely anticipated, Xi Jinping was re-elected as party general secretary for an unprecedented third five-year term. Does this signal a "Great Leap Backward" for China and how will it impact the global economy?
Nearly two thirds of economists foresee a U.S. recession in 2023, according to a recent Wall Street Journal survey. Economists are skeptical that the Federal Reserve can keep raising interest rates to cool inflation without causing businesses to lay off workers.
One of the long-standing public policy disagreements between Republicans and Democrats is over when is it appropriate for government to intervene in the economy. Republicans are prone to criticize government programs as being wasteful and inefficient, while Democrats maintain they can help fill gaps that the private sector cannot or will not address. The Infrastructure Investment and Jobs Act (IIJA), enacted one year ago, is an area of bipartisan agreement.
Following the midterm elections, pundits are scrambling to explain how Republicans failed to capitalize on the results, when several issues favored them. Heading the list were voter worries about high inflation, the weakening economy and rising crime. How then were Democrats able to overcome such formidable obstacles?
The Federal Reserve’s decision to boost the federal funds rate by 75 basis points at its November meeting was widely anticipated by market participants, following a disappointing September inflation report. Instead, investors have focused on the possibility that the Fed may slow the pace of policy tightening at subsequent Federal Open Market Committee (FOMC) meetings, which fueled the best monthly return for the Dow Jones Industrial Average since 1976.
The Federal Reserve and policy makers abroad were correct in pinpointing supply chain disruptions as the principal cause of the surge in goods prices last year. As pressures have eased, so have U.S. goods prices. So, why has inflation remained high?
With the midterm elections upon us, polls show that inflation looms as the top issue on voters’ minds. Indeed, it is the biggest obstacle Democrats face to retaining control of both houses of Congress.
Although the long-term correlation between prices for crude oil and natural gas is low, the magnitude of the price divergence today is unusually high. Consequently, why is it happening and what does it spell for the respective economies and financial markets?
A myriad of issues—Fed policy, inflation, recession in Europe, and a weakening of China’s economy—will likely cause global markets to stay volatile amid unusually high uncertainty.
The past few years suggest we may be entering a period of “Great Volatility” as the global economy has been buffeted by the COVID-19 pandemic, Russia’s invasion of Ukraine, and the effects of climate change. While these forces will likely lead to weakness ahead, decisions that central banks take to address high inflation can mitigate and limit the ultimate impact of these shocks.
A weakening of China’s property market would have spill-over effects to China’s main trading partners in Asia, Europe, and North America and would likely reverberate throughout global markets.
Some experts think that today’s energy crisis may become worse than the 1970s oil shock. Will Russia cut back on the contracted supplies of natural gas to Europe? If so, governments will need to secure supplies from global sources across the EU and to prepare gas rationing programs.
For the first time in the post-war era, the global economy has been buffeted by two shocks—the worst public health disaster in one hundred years combined with Russia’s invasion of Ukraine. What should investors do amid the heightened uncertainty?
COVID-19, international war, and inflationary concerns have all created a ripple effect through the stock market and the economy. It’s still uncertain whether the United States will fall into a recession; however, looking at certain trends from our history allows us to gain insight on what we may expect in the near future.
Markets are likely to stay volatile, and we are maintaining a moderate overweight in risk assets on the view that markets have priced in higher interest rates and a soft economy.
As we reach the midpoint of the year, investors find themselves confronting a highly challenging environment, with the Federal Reserve now emphasizing the urgency of bringing inflation under control over maintaining “maximum” employment.
At a time when both U.S. stocks and bonds have sold off significantly, the U.S. dollar has exhibited considerable strength against most currencies. Thus far, U.S. policymakers have not expressed concern about the dollar’s strength, as it helps to temper high inflation. But, it could become an issue if a deteriorating trade imbalance weakens the U.S. economy at some point.
Periods of market volatility are often reminders for investors to ensure investment strategies and risk tolerance are properly aligned. In this episode, we discuss recent market volatility, its implications for investors, and considerations for portfolio positioning going forward.
Investors should monitor the state of emerging economies, who often feel the fallout from Fed tightening when the U.S. economy is weakening and in several instances have caused the Fed to back off raising rates.
Returns for emerging markets equities have trailed those in the U.S. considerably for more than a decade now, while emerging markets bonds have fared relatively well versus U.S. bonds until this year.
In the wake of Russia’s invasion of Ukraine, the need for a clear international strategy has heightened. The U.S.’s response to the Russian invasion has been formidable, but it has yet to formulate a clear approach for China and allies in Asia.
Several factors—including elevated inflation and Russia’s invasion of Ukraine—have the potential to impact the strength of the U.S. economy in the coming year.
Investors need to weigh how good of an investment vehicle housing may be going forward. The main concern today is that housing is becoming increasingly unaffordable for many Americans, a result of record home price appreciation in the past two years coupled with surging mortgage rates this year.
With federal debt at record levels, inflation at four-decade highs, and the Federal Reserve about to tighten monetary policy, federal spending must be brought under control. How can President Biden move ahead with increased defense spending while also focusing on domestic priorities?
While investors currently are focused on the near-term impact of Russia’s invasion of Ukraine on the global economy and markets, the history of the Cold War suggests it may also have significant long-term repercussions.
History suggests that whenever there is geopolitical conflict, financial markets have reacted the most when energy prices spike and the Fed tightens monetary policy.
The average 30-year fixed-rate home loan has increased to 3.6% from 3.1% at the end of last year, which is the highest level since the coronavirus pandemic struck two years ago. This raises the question about how the U.S. housing market would respond to ongoing Fed tightening.
After the past two presidential elections, there has been a growing narrative about “two Americas.” One consists of thriving urban areas that voted overwhelming for Hillary Clinton and Joe Biden and the other of “hurting” rural communities that went heavily for Donald Trump.
While skeptics believe the Fed is behind the curve, investors have not lost confidence in it. But if bond yields and the dollar were to drift higher, the stock market could encounter turbulence in the coming year after smooth sailing over the past seven quarters.
Looking at the year ahead, several questions remain. Will the coronavirus pandemic finally be reined in? How will bond yields fare as the Federal Reserve tightens monetary policy? And, will risk assets continue to outperform?
Are inflation pressures likely to moderate, or is higher inflation here to stay? And, should the Fed be doing more? This episode discusses how investors may consider positioning their portfolios in light of these risks.
Why should President Biden do what no other U.S. president has done and indicate he is on board for the Fed to raise rates in an election year? The argument is based on both economic and political considerations.
As political leaders work to shift reliance on fossil fuels to alternative forms of energy, a major question is how to execute this without creating an energy shortage and higher inflation.
Investors do not appear rattled by inflation news, and 10-year Treasury yields are little changed at just over 1.5%, implying investors are willing to accept a negative real yield of more than 2 percent to hold government debt.
Global energy prices have surged to their highest levels in several years. What are the sources of these price pressures? And what can policymakers do to alleviate them?
The term “global supply chain disruption” has been cited frequently as one of the main consequences of the COVID-19 pandemic. But what exactly does the term mean, and why does it matter?
Even though we see the economic outlook as generally favorable after a strong stock market run and re-opening activity, we recognize that market volatility may increase, and some investors may be turning cautious—due to a variety of risk factors.
Evergrande, China's largest property developer, faces a possible default. A selloff of China's property market would have major repercussions for China's economy—and perhaps the global economy.
With economic activity back near pre-pandemic levels and relief programs about to expire, the Fed now faces the challenge of interpreting full employment to determine monetary policy.
The logic is that the over long periods the valuation of the stock market should mirror the performance of the economy. However, there can be significant deviations in the interim owing to cyclical forces.
When the international monetary system shifted from a fixed to a floating exchange-rate regime 50 years ago, it was a milestone event that marked the end of a prolonged period of low inflation, strong economic growth, and financial stability.
Since Xi Jinping became China’s leader in 2012, he has taken steps to reverse the trend of allowing China’s communist system to evolve into a more market-oriented model in which private businesses coexist alongside state-owned enterprises.
Investors have faced a nearly 40 basis point drop in Treasury bond yields over the past month. Two competing explanations have been put forth, and it is important to understand both because they have different implications for financial markets.
Forecasts of a powerful U.S. recovery this year appear on target. Looking ahead, the key call for investors will be whether the pickup in inflation will be temporary or sustained.
Most observers expect at least a temporary surge in inflation as the economy reopens from the COVID-19 pandemic, but there is greater uncertainty about the outlook beyond this year.
The bottom line is that in addition to their inherent risks, cryptocurrencies now face added regulatory burdens. For these reasons, we believe privately issued digital currencies should be considered speculative instruments.
As President Biden will find out, the easy part of governing is identifying worthy public needs; the hard part is paying for public programs and making sure they deliver on their objectives.
The case for the Federal Reserve to taper bond purchases and to raise interest rates will become compelling well before its expected timetable of 2024.
The policy shift that is occurring is an opportunity to test the precepts of Keynesian economics that embrace the government’s role in the economy versus supply side policies that favor tax cuts and deregulation.
The U.S. economy is poised for a powerful expansion but markets are likely to be choppy as the economy accelerates and inflation approaches the Fed's threshold.
The $1.9 trillion COVID stimulus plan has been greeted enthusiastically by investors as the U.S. stock market has set record highs. However, with the U.S. budget deficit reaching extreme levels, some economist are concerned the U.S. economy could overheat and lead to inflation.
Fort Washington's Senior Economic Advisor Nick Sargen shares a 2021 outlook for the economy and markets and how we're positioning investment portfolios.
One of the main objectives of the incoming administration is to counter growing income inequality in America. However, investors are likely to judge the Biden administration’s policies primarily by how they impact the U.S. economy overall.
Congress crafts a plan providing much-needed relief for COVID-19. Several factors coalesced encouraging Congressional leaders to reach an agreement but it may be difficult to sustain the spirit of compromise.
The recent surge in COVID has resulted in partial shutdowns of businesses in several states that threaten to dampen the pace of U.S. economic recovery. What is a reasonable way to break the stalemate?
The costs of outsized deficits may not be apparent now, but they will become more visible in the future if federal spending is not brought under control.
The U.S. dollar experienced a remarkable run over the past decade. March became the turning point coinciding with unprecedented U.S. policy actions to combat COVID-19. The dollar is likely to remain under pressure for the balance of the year and into 2021.
There is a high degree of uncertainty about how the economy will fare in the balance of 2020 and into 2021. Many investors are upbeat that it is headed for a quick recovery, but most economists believe recovery will be gradual and uneven following an initial bounce. What weighs on Fed officials is the possibility of a second wave of coronavirus cases that could hinder the re-opening of businesses.
The May jobs report surprised many investors who were prepared for a large increase in the jobless rate. While the news was a relief to the Federal Reserve, the numbers underestimate the full impact of COVID-19 on labor. Even though the U.S. stock market is back to levels before the pandemic, the path to recovery is still unclear.
While the U.S. government’s efforts to combat COVID-19 will likely lead to a post-war record budget deficit, bond yields have fallen to record lows amid a global recession. The long-term prognosis is problematic, however, because deficits are likely to remain abnormally high this decade.
The coronavirus shock is different from previous ones. However, the four-step framework we use to analyze the shocks on markets is still relevant today.
The conflict over oil and growing worries about COVID-19 marks the first time the global economy experienced simultaneous supply shocks. Markets are now signaling a tipping point has been reached with the global economy on the cusp of recession.
For the past 18 months, the greatest risk to the global economy and markets has been the ongoing escalation in the trade conflict between the U.S. and China.
Senior Economic Advisor Nick Sargen shares his insight on monetary policy easing, trade tensions and the impact on the U.S. economy, and possible investment implications.
Ten-year yields currently are around 2.1%, their lowest level since mid-2017, and about 115 basis points below the high of 3.25% reached last November.
The U.S. dollar has weakened against most currencies this year and especially against the euro. This flies in the face of forecasts that called for it to strengthen.
Emmanuel Macron’s election as President of France has buoyed European markets, as it is the third election this year in which populist candidates have been defeated.
The immediate effect of Donald Trump's victory is likely to be heightened market volatility while market participants will assess the economic policies of the Trump Administration.
Donald Trump unveiled his plans for the U.S. economy. Specifically, he pledged to restore growth of 3.5% per annum and to create 25 million jobs over the next decade.
Deng’s approach combined strategic planning by the central government with decentralized decision making at the regional and local levels.
Economics
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