![]() ![]() ![]() A 2017, pre-Tax Cuts & Jobs Act (TCJA), Congressional Budget Office International Comparison of Corporate Tax Income Tax Rates and analysis from Robert Barro and Jason Furman from Harvard titled Macroeconomic Effects of the 2017 Tax Reform, reach the conclusion that keeping TCJA’s 21% rate will significantly reduce the after-tax cost of structures investment integral to the evolution to ‘just-in-case’ supply chain management. The second tailwind, a capital investment recovery in 2021, will have a more significant and persistent impact on the US equity market and economy than the first, but has a hurdle to overcome in Georgia on January 5th. The recovery in global trade particularly from the emerging world is just beginning. additionally, since the financial crisis the majority of trade finance is dollar denominated creating a financial channel that impairs emerging market exports. This effect more than offset the classic currency competitiveness effect (cheaper goods boosting demand, link to BIS research).įigure 1: The dollar rallies during economic crises due to its increased role in the supply of ‘safe assets’. Despite an increase in trend personal consumption growth from 1.9% for the first 5 years of the US expansion to 3.0%, Mexican exports weakened due to a tightening of the supply of trade finance. The mid-2014 to 2016 25% increase in the trade-weighted US dollar had a counterintuitive effect on global trade best illustrated by Mexican exports to the US. The recovery in emerging market equities should prove more durable than export-dependent developed markets due to continued relative wage-cost advantages for labor-intensive products and the lagged effect of dollar weakness. We expect these markets to lose relative strength momentum prior to export growth peaking, however, for the first part of 2021 the ‘Mercantilists’ are likely to outperform. The recent strong relative performance of German, Japanese and export-dependent emerging market equities is attributable to the rebound in global trade. A robust recovery in global trade runs counter to the secular trend of deglobalization, in essence 2021 is likely to be the last hurrah for export-dependent nations as the world shifts from ‘just-in-time’ to ‘just-in-case’ supply chain management. The first tailwind is the combination of the trade war related global trade and manufacturing recession and the pandemic induced supply chain disruptions, as well as consumption mix-shift from services to goods. We expect double-digit US equity market returns in 2021 and negative returns for high quality, long duration fixed income primarily attributable to a faster than expected closing of the output gap resulting from both the pandemic and the trade war-induced global manufacturing recession that preceded Covid-19. ![]()
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