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Why the disconnect between stocks and the economy is worrying – CNN

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A version of this story first appeared in CNN Business’ Before the Bell newsletter. Not a subscriber? You can sign up right here.
What’s happening: MSCI’s All Country World Index is now up more than 35% from its low point on March 23. The index has notched seven straight day of gains.
America is in turmoil and stocks are booming. Is the market broken?
That’s despite ongoing concerns about the health of the global economy, little visibility on corporate earnings, uncertainty about the pace and shape of the rebound from coronavirus and widespread social unrest in the United States sparked by the death of George Floyd.
“The fundamental problem is market psychology and whether the narrative shifts from the summer of hope to the summer of discontent, where first consumers and then investors become jaded by a post Covid-19 hangover compounded by a White House running out of options on all front[s], be it domestic or foreign policy,” Stephen Innes, chief global markets strategist at AxiCorp, told clients Wednesday.
But beyond worrying that assets like stocks are due for a nasty correction, there’s another reason to be concerned about the disconnect between stocks and the wider economy, Jan Dehn, head of research at Ashmore Group, an investment management firm focused on emerging markets, told clients this week.
Dehn argues that stocks and bonds — which have been buoyed by record support from governments and central banks — have effectively become too big to fail.
“If central banks were to allow asset prices to reflect the actual underlying fundamentals — record levels of debt, record low productivity growth, record unemployment, record populism — the resulting crashes in financial markets would be so large that most Western economies would be plunged into deep and lasting depressions,” Dehn told clients.
This isn’t a viable outcome — which means investors have bet that they can count on central banks to keep propping up markets. “So far, they have been right,” Dehn said.
See here: The European Central Bank on Thursday is expected to expand its massive coronavirus-era bond buying program, providing fresh support.
So why is this a problem? Dehn said he’s worried that volatility will decline, hitting investment margins. Productivity, he fears, will also decrease as markets cease to weed out the laggards and encourage risk taking.
“As markets are put out of action through ever greater government intervention — de facto shifts towards old fashioned state planning — then markets cease to perform one of their most important functions, namely to bring down unsustainable economic systems,” he said. “Instead, the system is condemned to a slow death from the inside.”

IPOs are back as the stock market soars

lPOs had been put on hold by the pandemic as stock market volatility kept companies on the sidelines.
Now, with the VIX — a measure of S&P 500 volatility — at its lowest level since February, firms are once again looking to tap funding from public investors.
The latest: The Financial Times reports that Warner Music Group did not price its IPO on Tuesday to observe an industry-wide shutdown in support of the Black Lives Matter movement.
But the company is expected to go ahead Wednesday morning with a deal that could value Warner Music, the record group behind popular artists such as Cardi B, Lizzo and Bruno Mars, between $11.7 billion and $13.3 billion.
Others are set to follow. ZoomInfo Technologies is due to list shares on Thursday, according to the Wall Street Journal. The marketing data company on Tuesday boosted its target range for shares to between $19 and $20 due to strong demand.
It’s a sign of how much sentiment has changed since the US stock market hit its low point in late March. But PitchBook analyst Cameron Stanfill thinks it’s too early to claim a rebound is in full effect.
“Some of the biotech companies will continue to list and a handful of other companies that need or want to try their luck in the public markets,” Stanfill said. “But I don’t expect that to be near the volume we had the last two years.”
The data: In 2019, an estimated 178 companies went public in the United States, according to PitchBook. From March 1 to May 31, however, just 21 companies held IPOs. Eight of those were smaller and didn’t occur on formal exchanges.

The number of black leaders at US companies is still dismal

True corporate diversity can’t be achieved unless it’s reflected at the top. And given the persistent dearth of black professionals in power roles at major companies, corporate America has a long way to go, my CNN Business colleague Jeanne Sahadi reports.
Companies are not required to disclose the race and ethnicity of their C-suites and boards, so the statistics that do exist are often collected by hand or extrapolated from surveys.
Here’s what we know from a variety of sources:
  • Black professionals in 2018 held just 3.3% of all executive or senior leadership roles, which are defined as within two reporting levels of the CEO, according to the US Equal Employment Opportunity Commission.
  • Among Fortune 500 companies, less than 1% of CEOs are black. Today there are only four, down from a high of six in 2012, according to Fortune.
  • Black Enterprise’s 2019 Power in the Boardroom report found that among S&P 500 companies, there were 322 black corporate directors at 307 companies. Of those, 21 were chairmen and lead directors. But the report also found that more than a third of S&P 500 companies did not have any black board members whatsoever.
What gives? One problem is that corporate leaders aren’t doing enough to develop a pipeline of black talent to promote into the C-suite and to be named to boards, per Cari Dominguez, former chair of the EEOC and a member of the National Association of Corporate Directors. Read the full story.
Campbell Soup (CPB), Cinemark (CNK) and Canada Goose (GOOS) report earnings before US markets open.
Also today:
  • The ADP report on US private employment arrives at 8:15 a.m. ET.
  • The ISM Non-Manufacturing Index for May, a closely-watched gauge of the US services sector, follows at 10 a.m. ET.
Coming tomorrow: The latest data on initial and continuing US unemployment claims.

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Trump’s Biggest Economic Legacy Isn’t About the Numbers – The New York Times

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BETHLEHEM, Pa. — To understand how much President Trump has altered the conversation around the economy, just listen to Bruce Haines, who spent decades as an executive at U.S. Steel before becoming a managing partner of the elegant Historic Hotel Bethlehem.

The steel mills that still dominate Bethlehem’s skyline have long been empty. And now, so are the tables in the Tap Room, the hotel’s restaurant, a sign of the economic hardship caused by the coronavirus pandemic. “It’s been very difficult,” Mr. Haines said.

The president’s management of the pandemic is a prime reason many voters cite for backing his opponent. But Mr. Haines, who lives in a swing county in a swing state, is struck most by a different aspect of Mr. Trump’s record.

“I spent 35 years in the steel business and I can tell you unfair trade deals were done by Republicans and Democrats,” Mr. Haines said. Both parties, he complained, had given up on manufacturing — once a wellspring of stable middle-class jobs. “Trump has been the savior of American industry. He got it. He’s the only one.”

Bruce Haines, co-owner of Hotel Bethlehem, said the business has lost 40 percent of its income because it is unable to host large events and gatherings.
Credit…Hannah Yoon for The New York Times

In perhaps the greatest reversal of fortune of the Trump presidency, a microscopically tiny virus upended the outsize economic legacy that Mr. Trump had planned to run on for re-election. Instead of record-low unemployment rates, supercharged confidence levels and broad-based gains in personal income, Mr. Trump will end his term with rising poverty, wounded growth and a higher jobless rate than when he took office.

Still, despite one of the worst years in recent American history, the issue on which Mr. Trump gets his highest approval ratings remains the economy. It points to the resilience of his reputation as a savvy businessman and hard-nosed negotiator. And it is evidence that his most enduring economic legacy may not rest in any statistical almanac, but in how much he has shifted the conversation around the economy.

Long before Mr. Trump appeared on the political stage, powerful forces were reshaping the economy and inciting deep-rooted anxieties about secure middle-income jobs and America’s economic pre-eminence in the world. Mr. Trump recognized, stoked and channeled those currents in ways that are likely to persist whether he wins or loses the election.

By ignoring economic and political orthodoxies, he at times successfully married seemingly contradictory or inconsistent positions to win over both hard-core capitalists and the working class. There would be large tax breaks and deregulation for business owners and investors, and trade protection and aid for manufacturers, miners and farmers.

In the process, he scrambled party positions on key issues like immigration and globalization, and helped topple sacred verities about government debt. He took a Republican Party that preached free trade, low spending and debt reduction and transformed it into one that picked trade wars even with allies, ran up record-level peacetime deficits and shielded critical social programs from cuts.

Credit…Mark Makela for The New York Times

“He completely moved the Republican Party away from reducing Social Security and Medicare spending,” said Michael R. Strain, an economist at the conservative American Enterprise Institute.

On immigration, Mr. Trump remade the political landscape in a different way. He has accused immigrants of stealing jobs or committing crimes and — as he did in Thursday night’s debate — continued to disparage their intelligence. In doing so, he rallied hard-line sentiments that could be found in each party and turned them into a mostly Republican cri de coeur.

The Democrats changed in turn. Former Vice President Joseph R. Biden Jr. has positioned himself as the champion of immigrants, pledging to reverse Mr. Trump’s most restrictive policies, while rejecting more radical proposals like eliminating the Immigration and Customs Enforcement agency.

He has also been pushed to finesse his position on fracking and the oil industry, promising not to ban the controversial drilling method on private lands, and trying — with mixed success — to walk back comments he had made during the presidential debate about transitioning away from fossil fuels.

Shifts on trade were more momentous. Mr. Biden and other party leaders who had once promoted the benefits of globalization found themselves playing defense against a Republican who outflanked them on issues like industrial flight and foreign competition. They responded by embracing elements of protectionism that they had previously abandoned.

No matter who spends the next four years in the White House, economic policy is likely to pay more attention to American jobs and industries threatened by China and other foreign competition and less attention to worries about deficits caused by government efforts to stimulate the economy.

The reshuffling is clear to Charles Jefferson, the managing owner of Montage Mountain Ski Resort near Scranton, Pa.

“Those were not conversations we were having five years ago,” he said. “The exodus of manufacturing jobs, that was considered a fait accompli.”

Mr. Jefferson, 55, grew up in North Philadelphia in a blue-collar union family and remembers the hemorrhaging of jobs that many Democratic leaders said was unstoppable in a globalized world — even though such positions were deeply unpopular with many rank-and-file Democrats.

Manufacturing revived after bottoming out during the Great Recession but floundered during President Barack Obama’s second term. Mr. Jefferson, who said he voted for Mr. Obama, supported Mr. Trump in 2016. He plans to do so again.

Credit…Doug Mills/The New York Times

The sector still represents a relatively small slice of the economy, accounting for 11 percent of the country’s total output and employing less than 9 percent of American workers. But Mr. Trump has been a relentless cheerleader. While he often took credit for manufacturing jobs at companies like General Motors and Foxconn that later disappeared or never materialized, the pace of hiring in the sector sped up considerably in 2018 before stalling out last year.

As a result, in this election, unlike the last, the significance of manufacturing and the need for a more skeptical approach to free trade are not contested.

Mr. Biden, after decades of supporting trade pacts, is now running on a “made in all of America” program that promises to “use full power of the federal government to bolster American industrial and technological strength.” He has also vowed to use the tax code to encourage businesses to keep or create jobs on American soil.

Even voters who don’t particularly like Mr. Trump credit him with re-energizing the U.S. economy.

Walter Dealtrey Jr., who runs a tire service, sales and retreading business in Bethlehem that his father started 65 years ago, said he voted for Mr. Trump in 2016, but he was never a big fan of the president.

Credit…Hannah Yoon for The New York Times

“He talks too much,” said Mr. Dealtrey, who’s been around long enough to distinguish a new Goodyear or Michelin tire by its smell. “And his tone is terrible.” A year ago, he had considered the possibility of supporting a moderate Democrat like Mr. Biden or Senator Amy Klobuchar of Minnesota.

But with Election Day just over a week away, Mr. Dealtrey plans to once again support the president. Even after a few unnervingly slow months in the spring and some layoffs among the 960 people he employed at his company, Service Tire Truck Centers, he stills trusts Mr. Trump on the economy.

Mr. Dealtrey talked as he walked around stacks of giant tires that towered above his own six-foot frame, a Stonehenge-size monument to wheeled transport. He likes the president’s focus on “big manufacturing” and the way he “instills confidence in businesses to invest in this country.”

Just how much responsibility Mr. Trump deserves for reframing some key economic issues is up for debate. Frustration about job losses in the United States has been brewing for decades; the parties were diverging on immigration; and antagonism toward China over trade practices, suspicions of technology theft and its authoritarian tactics extends beyond the United States.

Credit…Ruth Fremson/The New York Times

“I don’t think he really has pushed the boundaries of any of those policy issues beyond where they already were,” said Mr. Strain of the American Enterprise Institute.

Similarly, Jason Furman, a chairman of the Council of Economic Advisers during the Obama administration, argues that Mr. Trump was pushed along by the same trends and forces that spurred his supporters. And on some issues, like immigration, he caused public opinion to move in the opposite direction.

In the end, it may turn out that the president’s most significant impact on economic policy is not one that he intended: overturning the conventional wisdom about the impact of government deficits.

By simultaneously pursuing steep tax cuts for businesses and wealthy individuals, raising military spending and ruling out Medicare and Social Security reductions, Mr. Trump presided over unprecedented trillion-dollar deficits. Emergency pandemic relief added to the bill. Such sums were supposed to cause interest rates and inflation to spike and crowd out private investment. They didn’t.

“Trump has done a lot to legitimize deficit spending,” Mr. Furman said.

Mr. Furman is one of a growing circle of economists and bankers who have called for Washington to let go of its debt obsession. Investing in infrastructure, health care, education and job creation are worth borrowing for, they argue, particularly in an era of low interest rates.

That doesn’t mean the issue has disappeared. Republicans will undoubtedly oppose deficits resulting from proposals put forward by a Democratic White House — and vice versa. But warnings about the calamitous consequences of federal borrowing are unlikely to have the same resonance as before the Trump presidency.

Back in his office, Mr. Dealtrey remembers how disturbed he once was about the size of the deficit. “I used to care about my kids and grandkids being stuck with it,” he said, leaning back in his chair. “But nobody cares anymore.”

“Maybe I don’t care anymore,” he said, momentarily surprised at his own words. “We’ve got bigger problems than that.”

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How Trump’s and Biden’s Tax Plans Will Help or Hurt the Economy’s Recovery – Barron's

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Chip Somodevilla/Getty Images

While political rivals are forecasting economic devastation if former Vice President Joe Biden were to raise taxes on the wealthy and corporations, many economists and tax analysts who have modeled outcomes have a different take.

The net effect of Biden’s proposals, when analyzed independently of spending and economic policies, would be negative economic growth ranging from -0.16% to -1.62% over the next 10 years, according to analyses by the American Enterprise Institute and Tax Foundation.

Slowed growth is attributed to higher taxes on the very wealthy, and major changes to businesses taxation, including an increase in the corporate tax rate from 21% to 28%, a doubling of the tax rate on certain income earned by foreign subsidiaries of U.S. corporations, and elimination of a 20% deduction for owners of pass-through entities with income of more than $400,000.

But when factoring in spending and economic plans—including those for trade, immigration, education, housing, health care, and other policies—the outlook varies by scenario.

An analysis by Moody’s Analytics finds that if Biden wins and Democrats win a majority in both the Senate and the House and enact his plans, average annual economic growth would be 2.9% and average annual wage growth would be 0.9% through 2030.

Moody’s finds that some 18.6 million jobs would be created over Biden’s four-year term, and full employment would be reached in the second half of 2022. Full employment is typically defined as an unemployment rate under 5%. It is about 8% today.

In contrast, if President Donald Trump wins the election and Republicans win the majority in both houses of Congress, the economic picture dims: 10-year economic growth would average 2.4%, wages would grow by 0.7% over a decade, 11.2 million jobs would be created over four years, and full employment would be reached in 2024.

If Congress maintains its split majority, with Republicans dominating the Senate and the Democrats in the House, the economic outcomes will be similar whether Biden’s or Trump’s tax policies are in effect—though somewhat more favorable under Biden’s presidency, according to Moody’s.

Read more: Here’s How Much You Would Pay Under Biden’s and Trump’s Tax Plans

Analyses that compare the two candidates’ plans are handicapped by a lack of detail issued by Trump. For example, while he has stated that he supports a capital-gains tax cut, none of the analyses factor this in.

Generally speaking, however, capital-gains tax cuts don’t typically help the economy, says Garrett Watson, a senior policy analyst at the Tax Foundation. “There is no evidence that capital-gains tax cuts are growth-enhancing.”

Email: editors@barrons.com

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Fall in Crude Oil Prices Puts USD/CAD on the Rise

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USD/CAD

A mid-October decline in crude oil prices produced a bleaker outlook for the immediate future of the Canadian dollar (CAD), which enabled the US dollar (USD) to get back on the front foot in the USD/CAD currency pair.

On October 15, crude oil prices shed over 3.5% of their value in a single day. The CAD is regarded as one of the world’s leading commodity currencies, such is the Canadian economy’s reliance on the money that it generates from exporting key goods.

Any decline in oil prices is liable to weaken the CAD, which thereby strengthens the USD’s position in comparison to the loonie. That was the case in March 2020, where oil prices plummeted to a four-year low and the USD/CAD rose to its highest level since May 2017.

Neither oil prices nor the USD/CAD currency pair behaved so dramatically in mid-October, but the general trends were the same. Experts have expressed their concerns about the future of oil prices in the coming months, so there may be more scope for the US dollar to make gains against its Canadian counterpart.

An otherwise strong year for CAD

While the USD’s position as a safe haven has proven reassuring to traders at several junctures throughout the year, the overarching narrative in 2020 for the USD/CAD currency pair is one of Canadian resilience.

USD/CAD rose by approximately 2% on June 12, with that single-day increase the consequence of the US Federal Reserve taking the investing community by surprise with its indication that interest rates would remain low for the next couple of years. That sent markets scrambling, with oil prices also falling to further weaken the CAD’s position.

Yet that was a fleeting moment of strength for the USD, with the CAD swiftly recovering its losses against the greenback. From June 12 to the start of September, the USD/CAD pair slumped by approximately 4.4%.

That saw its June mark of 1.3638 traded for prices in the region of 1.30 as September began. This is an indication of the strength of the CAD, as fewer Canadian dollars were required to purchase one US dollar.

USD/CAD

Source: Pixabay

 

That may not seem like a significant drop, given that the USD/EUR retracted by around 5.5% and the USD/GBP shrunk by around 5.9% in the same time period.

However, the USD/CAD currency pair is not one that is known for its volatility. This can be observed through the margin requirements put in place for forex brokers in Canada. Margin requirements contribute to Canada’s strict regulatory environment for currency trading. The margin requirement determines the percentage of their capital that a trader must put forward to open a new position on a market, with a higher margin percentage necessitating more funds upfront.

The reason that margin requirement is a good indication of a currency pair’s traditional volatility is that the pairs more prone to fluctuations have higher percentages. For example, the notoriously unpredictable pair of the South African rand and the Japanese yen (ZAR/JPY) usually comes with a margin requirement of around 29%, whereas the USD/CAD pair has a much more conservative 2% capital requirement for traders seeking to open up a position.

This makes the stretch between June and September for the USD/CAD currency pair particularly notable. The USD clawed back a small proportion of its losses in September, before almost retreating into the 1.31 region. The USD/CAD had not hovered around the 1.30/1.31 mark since January 2020, a testament to the CAD’s resurgence.

Oil concerns to dampen CAD optimism

The news of crude oil’s price decline gave the USD a platform to bounce back, with the USD/CAD ending October 16 at the 1.3225 level. Further gains are likely to be predicated on the long-term forecast for oil prices, with any bleak outlook for the commodity certain to be bad news for the Canadian dollar and the nation’s wider economy.

Other factors inevitably influence the USD/CAD currency pair, given the countries’ heavy trade links and geographical proximity. As demonstrated by that shift in momentum on June 12, the policies announced by either the Federal Reserve or the Bank of Canada can influence market sentiment.

General politics can also be significant. The last few months of 2020 for the USD/CAD are likely to be shaped by the outcome and immediate aftermath of the US presidential election, although this is not a phenomenon unique to the United States and the Canadian economy.

Markets all over the world will be affected by the victor’s presidential vision for the country, with their new social and fiscal policies having the potential to either instill confidence in the American economy or place the long-term future of the US dollar in jeopardy.

Given the US dollar’s prevalence all over the world, as a peg for some currencies and as the central part of dollarized economies, this promises to be an important close to the year. However, crude oil prices may still prove to be the dominant factor in shaping the USD/CAD currency pair.

USD/CAD

The International Energy Agency’s October report is grim reading for commodity currencies. The IEA calls the outlook ‘fragile’, raising serious concerns about the long-term prospects for growth in oil demand. The IEA anticipates a stock draw of 4 million barrels per day in the fourth quarter of the year, although this statistic should be caveated with the acknowledgement that these figures are coming off the back of record-high levels.

Yet the IEA ends its October report with the declaration that oil producers have little cause for optimism in the long term. At the start of 2020, some experts were predicting that oil prices would not drop below $50 per barrel (bbl) all year. Now, the IEA suggests that the projected curve for oil prices will not reach the $50bbl mark until 2023.

While markets will eventually adapt to these new oil price projections, Canada’s reliance on commodities makes it difficult to foresee any substantial immediate gains for the CAD against the USD. The USD/CAD currency pair may have moved in Canada’s favour for much of the year, but crude oil concerns may provoke momentum in the opposite direction.

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