Mid-Year Report 2015: What To Watch


In our third and final video, Michael discusses future economic concerns, including inflation, central bank policy, geopolitical changes, and commodity prices.

Transcript


Michael Conway: Welcome back. In this third and final video, we’ll consider the future of the economy. Let’s talk about the most important things to keep an eye on for the remainder of this year: Inflation, specifically wage inflation, central banks, geopolitical tensions, oil, and other commodity prices. Inflation debates will likely dominate the rest of this year, as the measure is a key determinant of where the financial markets move next. If the economy begins to advance at a sustainably fast pace, defined as 3% GDP growth or above, then inflation could follow suit, resulting in bond prices moving precipitously lower and assets moving out of that space. However, if inflation fails to tick up, stocks could potentially disappoint and bonds could once again shine bright.

An improvement in the economy could also spur wage growth, which could lead to greater demand for goods and a subsequent boost in the [inflatial 00:01:07] rate toward the Fed target. The most recent GPD report showed that one measure of inflation rose 2% in the second quarter, matching the Fed’s inflation target. We’ll see if the economy can maintain this pace in both GDP growth and PCE inflation rates. If these factors align, the Fed will likely follow through on their plan to raise rates this year.

Meanwhile, everyday people believe inflation is much higher than market experts, because the prices of everyday items, except gasoline prices, have gone up, while the price of other discretionary items have declined. This averages out to not much inflation, but disproportionately attacks the lower and middle class. The essential items, such as food, childcare, healthcare, and college represent a much larger percentage of their disposable income. If wage growth does not improve as inflation ticks higher, consumer spending, and therefore broader economic growth, could falter.

In a historic move, the European Central Bank actually implemented negative deposit rates for financial institutions this year. Leads of the Eurozone are so concerned about deflation and the lack of economic growth that they’re raising incentives for banks to increase lending and for assets to move into riskier areas of the financial market. With continuous aid to help spur economic growth, central banks have continued an unprecedented intervention in the capital markets. While markets continue to react positively, both in bonds and stocks, it’s difficult to know the long-term effects of escalating debt.

After a disappointing first quarter, US GDP grew by 2.3% in the second quarter, brightening the forecast for a full year of 2015 results. What should we fear the most? Should we be afraid of central banks printing money and their potential to spark massive inflation, or should we be more afraid of an economy unprepared to resume growing at a normal pace despite recent improvements? With interests already at near 0% around the world, what ammunition do we have left to combat this lack of growth? The European Central Bank took a page from the Federal Reserve’s playbook and began a round of quantitative easing. The goal was to spur economic growth. It proved effective. The Euro area began showing signs of recovery. The Euro lost value against the US Dollar, which helped European exports. Eurozone consumers have been spending the windfall created by lower oil prices.

In many ways, we’re entering unknown territory. It’s become clear that even the central bankers are unsure as to how their massive quantitative easing programs will truly affect markets in the long term, and they’ve never implemented such policies to this extent. For now, massive inflation certainly remain a risk, but a true recovery in the economy could help restore balance down the road. Lower oil prices have been a benefit to consumers, as they spend the money saved by lower gas prices on other consumer items.

In addition, heavily oil-dependent industries like trucking and airlines have benefited from a boost to bottom lines, which could result in higher capital spending and a boon to the overall economy. However, lower oil prices have also affected the profitability of energy-related industries, lowering business investment. Meanwhile, other commodities like gold, aluminum, and copper have also fallen dramatically, possibly a signal of oversupply, falling demand, and global slowdown.

Despite these ongoing concerns, some positive factors going forward could bolster a more sustainable economic recovery, including stronger wage growth and improvements in consumer confidence. As a reminder, these are our opinions, so make sure you talk to your financial advisor before implementing anything based on what we discussed here today. For the benefit of our existing clients, we only accept a limited number of new clients each year. We want to make sure it’s an ideal fit and that we can add value to the current planning. Who do you know that would benefit from a team dedicated to guiding families through the financial decisions of life? Thank you for joining us. As always, please do not hesitate to contact us with any questions you may have. Thank you.