Column: The Outlook: Politics is Secondary
By Tony Crescenzi
Stepping back from Washington and global politics, there is one word and one number to describe the factors that will likely drive economies and markets in 2017:
- Stability -- (think China)
On “stability,” there is likely to be a pre- and post-October agenda in China, one that favors stability until the 19th Party Congress gathers in the autumn for its twice-a-decade gathering to elect new leadership in China’s government. China, ahead of its important gathering, will favor stability foremost, and there are numerous indications along these lines, with recent data strongly confirming the thesis. This is good news for the global economy. Moreover, with Washington having difficulty getting much done, the U.S. dollar will more than likely be kept in check, further underpinning the stability argument, and in particular emerging markets and the global growth story.
In this regard, 5.5% is the rate at which many expect global nominal GDP to advance this year. Historically, a 5.5% gain in global nominal GDP equates to double-digit gains in corporate profits. Such a gain has tended to boost global spending on business equipment by about 5%. This profit rebound therefore will help fuel a virtuous cycle of increases in production, income, and spending.
In other words, despite distractions in Washington and around the world, attention should continue to be placed on how the global economy is faring in and of itself. Markets will be driven mostly by this outlook. The risk is the outlook on tax cuts. If they don’t occur, financial conditions will worsen and harm the economic outlook.
To be sure, there are many negatives about the initial failure of the U.S. to pass healthcare reform, but they are dwarfed by the above. To put it plainly, markets for some time have had to contend with dysfunction in Washington; it's nothing new. More weight needs to be given to the power of democracies and capitalism. On the former, checks and balances matter. On the latter, investors should stay mindful of the power of Adam Smith's notion of the invisible hand guiding economies rather than the heavy hand of government.
Don't Fear Populism
While it is important for markets and economic agents to be respectful of the populist movement in the United States and Europe, one shouldn't be overly fearful. There are two reasons to stay calm and seek a more balanced assessment toward the movement:
- Both the U.S. and Europe are democratic societies and,
- They are capitalist societies
Democratic societies are governed by constitutions where the rule of law is their foundation. The existence of constitutions and democratic processes therefore trump all - pun intended. Therefore, no matter how extreme the endeavors of elected populist leaders, their power to implement change is limited by the checks and balances of the democratic process written in constitutions. This critical fact will endure so long as populists have minority representation within government, as is now the case in America and Europe.
There is another calming element to consider when weighing the impact of populism on democratic societies: elections. In the same way that populist candidates can be voted into power, they can also be voted out.
Whatever the case, whomever populist voters choose in any election would remain bound by national constitutions, which for investors should outweigh fear of change.
Capitalism is the second calming factor. History has demonstrated the power of the "invisible hand" in capitalist societies, where nations have thrived and built wealth despite a plethora of often very significant challenges. This ideal, which was advanced significantly in the year 1776 by the famed writer Adam Smith in, "The Wealth of Nations," suggests that society as a whole benefits economically from the financial endeavors of households and businesses acting primarily for themselves.
From this perspective, capitalists by their nature are agile, opportunistic, and have the same remarkable ability to adapt that human beings have displayed throughout history. To a capitalist, the profit motive trumps all else - pun intended.
Consider the case of the United Kingdom and its decision last year to vote in favor of leaving the European Union. It resulted in a great deal of fear about the outlook for the UK economy, yet its stock market has gained about 20 percent since then. What happened? Investors focused on the outlook from the bottom-up, which is to say they focused on how companies would adapt and fare after the vote, concluding that a rebound in corporate profits in the UK and around the world trumped all - pun intended.
In sum, stay focused on how economies are faring in their own right. Second, it is wise in the current populist era to consider the importance of the structures of democratic and capitalist societies and stay focused on the long-term drivers of economic growth rather than short-term influences.