The resilience of the equity market in the face of significant ‘political risks’ – home and abroad – has been impressive. Technology companies have been responsible for a large part of the rise in the US stock market since the beginning of this year. Apple, Facebook and Amazon alone account for nearly one-third of the gains in the S&P 500. There has been too much focus on ‘politics’, and not enough on the big structural changes in the US economy that imply inflation will remain low even as unemployment continues to fall. The current cycle has the potential to be the longest post-war economic expansion.
The sharp rise in R&D spending witnessed in 2016 reflects a big push by the tech giants into new markets. Driverless cars, more powerful smartphones, AI, e-commerce, and satellite communications are just some examples that reflect a powerful innovation cycle. President Trump may struggle to fulfil his election campaign promises, but the stock market could hit new highs in the coming weeks and months if the stand-off with North Korea is ‘resolved’.
However, today’s innovation is creating plenty of losers, as well as winners. The price wars in wireless communications are intensifying. Last week, Verizon announced it had lost 307,000 subscribers in Q1 despite the relaunch of an unlimited data plan to combat customer defections. Net income fell 20%. Other sectors that pose a credit risk include energy, utilities, commercial property, autos and retail (shopping malls under threat from Amazon).
Summary
- Structural changes to keep inflation low as unemployment rate falls
- For example, price wars in wireless are intensifying
- Disinflationary risks place limit on how far Fed can hike
