Introduction
Its time to take a big deep breath. Covid, Inflation, Wars. It has been a stressful couple of years, however with the turn of the new year, many of us find ourselves reflecting upon the previous year and setting resolutions for the future. While there is no way to guarantee that the upcoming year provides less uncertainty than the year before; we can promise to help you adapt with life as it evolves. Life is constantly asking us to adapt as it changes. It’s important to remember that change doesn’t only bring fear. It provides the opportunity to evolve, evaluate and embrace your current situation. Stressors will naturally arise throughout the year; and as they ebb and flow, the Fortune Financial Family will be here to support and guide you along the way.
Macroeconomic Outlook
“Don’t Bet Against the US.” As an investor, this saying has held true since we were born. Recessionary alarms were ringing non-stop since the post covid inflationary period, yet nothing happened. Are we still waiting for one? The answer is not black and white. There are certainly still fears that the US may fall into recessionary territory (Outlined in our Mid-Year Newsletter), but the consensus view is that recession is becoming less likely. The FED has decelerated the wild inflation, but now it is time to land. The question remains whether that landing is smooth, “soft-landing”, or if there may be some minor turbulence on the way down. The current economic data is quite promising, and while emotions normally do not play into economic environments, it is important to remember that we are entering an election year. While we remain aware of the short term impacts emotional decisions can have on markets; the underlying data is much more indicative of long-term trends.
Current US Economic Data – Source: Ycharts (1/2/2024)
- Real GDP YoY – 2.9% (Measure of the U.S. Economic Growth)
- CPI YoY – 3.14% (Measure of Inflation)
- 10-year Treasuries – 4.50% (Considered the Risk-Free Rate of Return)
- Unemployment Rate – 3.70%
The United States Economy is the largest in the world. The resources the financial industry pours into research and forecasting should allow us to understand where the economy is going next, but these predictions are rarely accurate. How is the biggest economy, with the most resources aimed to understand and predict it often wrong? The answer is because no one can predict the future; there are just too many variables. When will the FED cut rates, and by how much? There are many predictions and probabilities out there, but we are not focused on taking a gamble or making bets. We are focused on how to protect our clients’ (YOUR) financial stability and well-being. If the FED cuts rates, we will respond accordingly. If rates are higher for longer, we will respond accordingly. Too many people get caught up in trying to predict the future rather than prepare for it.
Geopolitical Implications for US Markets
The world has seen rising geopolitical tensions that have erupted into conflicts in numerous areas around the world. Markets typically have an adverse reaction to such events; however, the US markets have been relatively unphased. Is the US unaffected by global geopolitical conflicts in Eastern Europe & the Middle East? Below will explore the different conflicts.
Russo-Ukrainian Conflict Still Dragging On?
A world power invading a much smaller country should have been a quick and decisive victory. Russia spent more than 11 times Ukraine’s military expenditure in 2021[1]. How has such a lopsided fight continued to drag on for nearly two years? There have been plenty of wars in recent history that continued to drag on far longer than necessary with no end in sight. The Vietnam war is a perfect example. The only end is by means of exhaustion, which can take form in various ways. For instance, in Vietnam, the exhaustion came via public outrage and the loss of American lives. In Ukraine, the exhaustion would most likely come from a depletion of financial resources. While Russia might not deplete their financial or military resources; their leaders might grow tired of global sanctions that are hampering their economy. The biggest geopolitical risk when Russia invading Ukraine was that this conflict could drag other world powers into the mix, however as time drags on, this is becoming increasingly less likely. While this conflict continues to grind on, the decreasing likelihood of US military intervention means this conflict is having a minimal impact on US markets.
Middle East Powder Keg
The Balkans were considered the powder keg of Europe in the early 20th Century. The Middle East could be considered the powder keg of our world today. Hamas, a recognized terrorist organization, launched a surprise attack on Israel on Oct. 7th, 2023. The conflict in this region is one of the longest and most complicated in our world today. There is no easy solution, and conflict is a normality in this region. This surprise attack, however, escalated this conflict into a hot war. This escalation has global leaders scrambling to find a solution. Regardless of the fearmongering the media portrays, no leader of a country is actively seeking to start the next world war based off treaties made decades prior. The contagion risk that this region has is much larger than the Russo-Ukrainian conflict. The importance of this region on a global stage has been outsized because of the impact oil can have on industrialized economies.
A Yemeni rebel group, Houthis, has launched a campaign to disrupt global shipping routes until there is a ceasefire in Gaza. This question becomes, how can such a small rebel group be able to disrupt global supply lines? The answer is simple: it’s all about geography. Remember back to 2021, when a large shipping vessel was stuck in the Suez Canal? A ship getting stuck and blocking a canal became international news overnight. The Bab el-Mandeb Strait connects the Red Sea to the Gulf of Aden. This strait sits along Yemeni borders and is akin to the Suez Canal in terms of the effect of global trade. The difference is that a ship is not stuck, but a rebel group is attacking ships that pass through. This has already garnered US military intervention, another highlight of the geographical importance of this shipping route. Europe and Asia rely on this shipping route deeply. Having to find an alternative route would mean that ships traveling from Asia to Europe, and vice versa, would have to go around the bottom tip of Africa. The pandemic highlighted the importance of supply lines in our globalized economy, thus the immediate intervention from a multinational coalition.
Long term US corporate earnings have been largely insulated from geopolitical conflicts since the start of the millennium. The market prices in long term impacts rather than short term fluctuations, leading to muted reactions for geopolitical events. Does that mean the US economy is also insulated? No, the economy is influenced by numerous factors such as global trade, oil prices, & other important commodities. A broadening conflict in the middle east along with a cold winter in Europe would affect gas prices in the US. Ukraine is one of the largest wheat producers, so the continuation of the Russo-Ukrainian War will have a continued impact on grain markets. These are just two examples of how conflicts on the other side of the globe can have outsized impacts on consumers daily lives. The resiliency & adaptability of US corporations has repeatedly shown the ability to handle these geopolitical pressures and come out on top.
Looking Forwards
While we can’t predict the future, we can be diligent in preparing for it. At Fortune Financial Planning, we are ready to embrace change as it comes, and look forward to better understanding your world as we help you design your life around present times. Please don’t hesitate to reach out to us anytime you feel uncertain or need a reminder that “it’s going to be okay.” We look forward to addressing your concerns and working together to find individual solutions that are designed to maximize your life’s goals and aspirations.
[1]https://www.statista.com/statistics/1293277/ukraine-military-spending/
https://www.statista.com/statistics/1203160/military-expenditure-russia/