4 Economic Threats to Investor Returns

In these times of geopolitical uncertainty, Morningstar's Bob Johnson, thinks that there's four areas of economic concern that investors should have on their radars

Robert Johnson, CFA 8 December, 2016 | 2:31PM
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Jeremy Glaser: For Morningstar, I'm Jeremy Glaser. Bob Johnson, our Director of Economic Analysis, thinks that there's four areas of economic concern that investors should have on their radars.

Bob, thanks for joining me.

Bob Johnson: Great to be here today.

Glaser: The first of these topics is trade. Obviously, we've been talking a lot about trade with President-Elect Trump's rhetoric about it. But if you look at the actual trade numbers even before he was elected, you think that there's some cause for a concern?

Johnson: Yeah, I think, everybody is kind of sitting here being worried about what Trump is going to do with trade and it could ruin things and it certainly could. But even before he changes his policies, we had some relatively bad news this week on the October trade data. We've been doing relatively well on the trade front.

Exports had been growing relatively slowly as we expected, but imports had also been very slow. And in October, we kind of changed that, the dynamics that exports were down, but imports were up and up a fair amount, which widened the trade deficit from $36 billion to $42 billion and now – again, this is only the first month of the quarter.

So, we can't totally panic, but it looks like trade will be something as early as the fourth quarter that has a negative impact on GDP again instead of a positive aspect. And certainly, the data would seem to suggest it could be a rather significant increase – or an effect on the GDP. GDP now and other sources are suggesting that GDP growth in the fourth quarter will probably be something more like in the mid-2% range instead of the 3%, 3.5% that they started the quarter with.

Glaser: And this could really weigh on growth for some time not just in the fourth quarter if we do see big changes in trade policies?

Johnson: Absolutely. I mean, it's been – the trade policy could just put fire on the fuel. But I think we had been in this honeymoon period where everybody kind of dropped worrying about trade because the numbers looked so good and like I said, the reason was that imports fell almost as much as exports and so it was really quite a positive effect and then we had a few months of soybeans helping the numbers along where we had massive soybean exports and now those are kind of reversing themselves a little bit and hurting the numbers. So, again, I think, trade will be something to worry about next year even without any changes in policy of Donald Trump which will just make the situation worst.

Glaser: Let's turn to job growth. We had an okay, maybe slightly disappointing report last week for November. But you saw some evidence that we could see some pretty slow job growth in the future?

Johnson: Yeah, I'm a little bit concerned and have been for a while about the jobs number and I think that the idea of we're going to get back to some up over 200,000 number every month when things get back to normal again. And I just don't see it in the data and certainly, the jobs report last week was not as bullish as everyone hoped and the wage growth wasn't so great in there and there were a lot of – a little detailed parts of it that really didn't look all that hot.

And now, this week we had the JOLTS report and again, it showed job openings were down a little as were hires and openings weren't down quite as much hires, but the fact is that we're now at a point where job openings are about the same level as they were a full year ago in the month of November. So, we're not adding more openings. So, that suggests that people would think job growth is going to accelerate to an above 200,000 number. It isn't going to happen.

Glaser: This might seem like ages ago, but in January, we were all very worried about China, that big sell-off at the start of the year. But those worries really have receded into the background. You think that we shouldn't take our eye off what's happening there?

Johnson: No, I think, there's still a lot of concern there. We've talked about the debt expanding in China and there has been a lot of debt build-up there, especially in the private sector and we're worried about that right now. And I think that clearly some of the Chinese are worried, this latest data on currencies outflow showed more outflows, an above-expectations outflows, for the most recent month continuing a trend that's been going for some time. The outflows weren't quite as bad as last January when things were at the high and everybody was worried about Chinese growth. But they are getting pretty high again and certainly, we've seen other evidence that this money has indeed been flowing overseas.

Glaser: We've seen some euphoria over oil prices recently after this OPEC deal. That might be a little bit misplaced do you think?

Johnson: Yeah, I think that we shouldn't necessarily be jumping up and down about higher oil prices. And again, I think, maybe it doesn't quite come to full fruition. But certainly, the higher oil prices will generate higher gasoline prices and that's not great news for the consumer who is already facing increased inflation that we've talked about many times.

So, I'm worried that the oil prices have gone so much so fast and certainly, if nothing else – it's not fully reflected yet the higher oil prices in gasoline prices, but nevertheless gasoline prices are not going down kind of in this November-December time period as they normally do and the way they seasonally adjust the data will actually make it look like there's some pretty high gasoline inflation.

Then we'll creep into January and February when you remember that gasoline prices a year ago just plain cratered to under $2 and I don't think that's going to happen this year. So, I think, we'll have some pretty hefty gasoline inflation in January and February and that will hurt consumer spending and it will mess up a lot of the data too.

Glaser: Bob, thanks for highlighting these four areas today.

Johnson: Thank you.

Glaser: For Morningstar, I'm Jeremy Glaser. Thanks for watching.

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Robert Johnson, CFA  is director of economic analysis with Morningstar.