Are Retail Reports a Sign of a Slowing Recovery?

Will Increasing Oil Prices Put a Ceiling on Global Economic Growth?

How Will Uncertain Inflation Outlook Impact Stock Market?

Will The Federal Reserve Create a Taper Tantrum in 2021?

How Will a Steepening Yield Curve Impact Markets?

How Will the Projected Commodity Super-Cycle Impact Investors in 2021?

Commodity Super-CycleAs the January 2021 World Bank Pink Sheet documented, prices increased month-over-month from November 2020 to December 2020. Highlights include the price of oil jumping by 15 percent. The cost of fertilizer jumped 2.2 percent, grains increased by 3.8 percent and iron ore jumped by 25 percent. While there’s been no official “commodity super-cycle,” according to economists or financial analysts, the trend certainly shows commodity prices increasing.

2020 caught the world off-guard with the coronavirus pandemic, sending the price of oil negative. According to Rice University’s Baker Institute for Public Policy, on April 20, 2020, “the prompt contract price” or how much a barrel of West Texas Intermediate (WTI) cost for May 2020 deliveries went negative, falling $50. It eventually rebounded to $45 per barrel in November as vaccine optimism began to take hold.

For other commodities, the story was not as bad, signaling what might be another commodity super-cycle. On Aug. 4, 2020, gold broke the $2,000 mark. With central banks and governments spending to support the economy due to the pandemic, it put pressure on global currencies. For example, with the U.S. dollar index dropping nearly 10 percent from March 2020 to August 2020, precious metals such as gold became a hedge against inflation.

Many would assume that commodities surged in part from the economic damage of COVID-19 but, looking at the data, commodities were seeing a resurgence at the start of 2020 – well before the pandemic negatively impacted the global economy.

With data as recent as March 5, the International Monetary Fund shows how commodities changed before the pandemic, during, and as the recovery is underway for the first two months of 2021. Looking at the IMF’s “Actual Market Prices for Non-Fuel and Fuel Commodities” chart, one can see how commodities bottomed out during the pandemic and are showing signs of significant growth.

One metric ton of wheat was $186.10 in 2018, $163.30 in 2019, $185.50 in 2020. In Q1 of 2020, it was $173.80, Q2 was $174.80, Q3 was $183.00, Q4 of 2020 was $210.5. Then the first two months of 2021, one metric ton of wheat was $237.90 and $240.80, respectively.

For metals, one metric ton of copper was $6,529.80 in 2018, $6,010.10 in 2019, $6,174.60 in 2020. In Q1 of 2020, it was $5,633.90, Q2 was $5,350.80, Q3 was $6,528.60, Q4 of 2020 was $7,185.0. The first two months of 2021, the price was $7,972.10 and $8,470.90, respectively.

Spot Crude priced per barrel in U.S. dollars was $68.30 in 2018, $61.40 in 2019, $41.30 in 2020. In Q1 of 2020, it was $49.10, Q2 was $30.30, Q3 was $42.00, and Q4 of 2020 was $43.70. Then the first two months of 2021, Spot Crude was $53.50 and $60.50, respectively.

For the Spot Crude figures, the IMF uses the Average Petroleum Spot Price (APSP), which averages equally three crudes: West Texas Intermediate, Dubai, and Brent.

Will China Lead the Globe’s Super-Cycle?

As the United Nations defines it, a super-cycle is when there’s a paradigm shift toward increased demand, lasting at least a decade and up to 35 years “in a wide range of base material prices.” It focuses on “industrial production and urban development of an emerging economy.”

Looking at China could signal what the globe will follow economically. According to Refinitiv, China saw a positive growth of 2.3 percent of its GDP in 2020, compared to the global average of -3.5 percent. As the world emerges from the pandemic, it will undoubtedly consume more commodities. When it comes to 2021 GDP expectations for China, the World Bank expects the country to grow by 8 percent to 9 percent.

Looking forward to 2022, Eikon predicts that China’s GDP will grow by 1.6 percent more than the rest of the world, and 3.1 percent higher than America’s GDP expected growth rate in 2022.

Much like the pandemic was not in anyone’s economic forecast, if the global economy is in a commodity super-cycle, savvy investors will be ahead of the curve if a super-cycle materializes. 

How Will Surging Oil Prices Impact the Economy in 2021?

Now that the Keystone XL pipeline is being shut down and southern parts of the United States are experiencing extremely cold weather, how will increasing oil prices impact the economy as the COVID-19 vaccine is being rolled out?

With West Texas Intermediate (WTI) crude closing at $58.22 per barrel on Feb. 11, 2021, and likely higher due to the cold snap in the United States, the price of oil is expected to impact the U.S. and global economy.

Consumer Demand

One of the major impacts of increasing oil prices is the rising price of gasoline. With higher oil prices rippling throughout the economy, understanding how it impacts consumers is one way to see how the economy in 2021 is likely to perform.

As the Federal Reserve Bank of San Francisco points out, there’s a close correlation in pricing between gasoline and crude oil pricing. They point out that WTI and what American consumers pay for gasoline to fill up their car track each other quite closely — as oil prices increase, so do consumer prices for gasoline.

Historic Price Trends in Relation to Today

When it comes to looking at how oil prices impact inflation, looking at historical prices gives helpful insight. In the 1970s, the price of oil increased tenfold, from $3 in 1973 (pre-oil crisis) to more than $30, due to Middle East tensions in 1978-1979 resulting from the Iranian Revolution, according to The Federal Reserve and the U.S. Energy Information Administration (EIA).

However, as time progressed beyond the two oil crises of the 1970s, this correlation became weaker. When the 1980s began, so did the association between oil prices and rising inflation. The U.S. Bureau of Labor Statistics (BLS) explains this rapid increase in the cost of oil drove the consumer price index (CPI), one way to measure inflation, from 41.20 in the beginning of 1972 to 86.30 as 1980 came to a close. As the BLS illustrates how the 1970s experienced high inflation, it took three times as long (24 years) for the CPI to double between 1941-1971.

With the two Oil Shocks passed, the 1980s and the 1990s ushered in a new divergence of how oil prices ultimately impacted what consumers paid for oil and oil-dependent products. This is illustrated by looking at the impact of the Producer Price Index (PPI), or wholesale cost, versus how consumers ultimately felt, or the Consumer Price Index (CPI).

CPI and PPI Data and Oil Prices

Looking at the CPI, especially in the 1990s, statistics from the EIA show that the price per barrel of crude oil went from $14 to $30 in six months. However, data from the BLS shows that CPI started at 134.6 in January 1991, eventually reaching 137.9 in December 1991.

Later, from 1999 to 2005, the EIA’s data shows the price of a barrel of oil jumped from $16.50 to $50. While the price nearly tripled, the BLS’ CPI jumped from 164.30 in January 1999 to 196.80 in December 2005, an increase of 33.5 over nearly six years.   

Looking at the Producer Price Index (PPI) data, per the Federal Reserve Bank of St. Louis, from 1970 to 2017, the correlation was 0.71. For the CPI, during the same time frame, it was only 0.27. The difference between the CPI and PPI, according to the Federal Reserve Bank of St. Louis, is due to the higher proportion of services provided in the United States, which are less oil-reliant for raw materials.

External Factors

With the expected relief payment of $1,400 per individual and additional money allotted for dependents, coupled with continuing vaccinations and the reopening on the U.S. and global economies, there’s much stimulus expected to provide consumers with a financial cushion. However, with the increased spending by the federal government and pressure on the U.S. dollar, only time will tell how the price of crude oil will impact consumer spending and company earnings.

How Will Single Party Governing Impact the Markets in 2021?

Biden Stock MarketAbout four in 10 Americans (41 percent) look positively toward single-party control at the national level, according to an October 2020 Gallup annual governance survey. This is compared to 23 percent of respondents desiring multiparty control. Breaking it down by party, 43 percent of Democrats want single-party rule, while 52 percent of Republicans desire single-party governance.

One notable finding is that, looking back to 2002, 32 percent preferred single-party control when it comes to independents. This was the highest-ranking over the past 18 years. As the Brookings Institution points out, now that Jon Ossoff and the Rev. Raphael Warnock are U.S. Senators, the U.S. Senate is divided 50-50 with Vice President Kamala Harris able to break a tie. According to political experts’ forecasts, President Joe Biden is likely to accomplish much of his agenda in light of these circumstances.

However, as the Brookings Institution notes, many are expecting West Virginia Sen. Joe Manchin to be the deciding vote on many upcoming pieces of legislation in 2021. His track record proves he’s been a wildcard depending on the legislative topic at hand.

When Manchin was West Virginia’s governor from 2005 to 2010, he lowered taxes, gave teachers higher salaries, helped repair the state’s worker compensation system, and reduced the state’s overall liabilities. He’s opposed to adding additional justices beyond nine (other than replacing justices who have retired or passed away) and is against reducing funding for public safety needs. Yet, he did not support President Trump’s tax cuts in 2017, nor did Manchin have any interest in reducing the scope of the Affordable Care Act.

President Biden Tax Proposals

If President Biden’s proposed legislative priorities on the campaign become a reality, they will undoubtedly impact personal and publicly traded companies’ earnings. According to The Tax Foundation, Biden proposes increasing the highest personal marginal income tax rate to 39.6 percent from 37 percent. He’s also expected to advocate changing the highest corporate income tax rate from 21 percent to 28 percent.

Additional proposals include taxing capital gains at 40 percent for those who earn $1 million or more, along with The Tax Foundation reporting the potential for at least a tax of 15 percent on income that publicly traded companies disclose on financial statements available to equity holders.  

Implications of Tax Cuts (and a Lack Thereof)

According to Stanford Graduate School of Business and research done by Rebecca Lester, associate professor of accounting at Stanford Graduate School of Business, there are some insightful findings on how tax policy impacts corporations’ bottom lines.

One of the primary findings is that while companies take some of the increased savings from fewer taxes and deploy it outside the United States when it comes to using it domestically, it’s used for automation, not to create additional employment opportunities.

For example, the Domestic Production Activities Deduction (DPAD) gave companies a tax deduction that would essentially lower their income tax obligations on earnings from domestic manufacturing. However, there was no requirement to increase domestic manufacturing or employ more Americans.

Based on this example, companies cannot only save money directly from the tax cuts but also indirectly through long-term gains via automation. Looking forward to how a Biden Presidency will shape corporate earnings and the resulting market performance will likely depend on how a few moderate Senators vote. 

How Will the Biden Administration’s China Policy Impact Markets?

The Obama and Trump administrations couldn’t have had a more different approach when it came to U.S. relations with China. As the Institute for China-America Studies (ICAS) explains, under the Obama administration, the United States favored a trade and investment approach when dealing with China, while the Trump administration had a national security focus. The ICAS believes the Biden administration will address trade and economic imbalances through a modified approach, including reducing tariffs on imported Chinese goods over time to decrease inflation for American consumers. Another example is maintaining pressure on China to cut government subsidies for competing industries, currency games, and exporting products to the United States at artificially low prices.

While the Obama administration engaged China through trade and investments, it didn’t emphasize engaging the country on the national security side. The Trump administration looked to make American industries independent of Chinese production, especially for rare earth metals, pharmaceutical precursors, etc. With the inauguration of President-elect Biden, the incoming administration is expected to maintain the Trump administration’s quest to give many American industries a fighting chance of survival, albeit how it will be accomplished will likely vary.

The Biden administration is projected to lower tariffs on Chinese imports gradually. This is expected to be done to reduce the tension of the existing trade war. It’s also expected to be done to lower the rate of inflation and help businesses that import input materials from China.

Based on statistics according to the American Action Forum, approximately $57 billion was paid by consumers on an annual basis per 2019 import numbers, due to tariffs instituted by President Trump. This action is likely to increase consumer spending and increase companies’ earnings. However, the Biden administration is still expected to keep other forms of trade pressure on what many believe are unfair trade practices by China.

Biden also is expected to raise the same concerns the Trump administration did regarding Chinese trade and commerce, including China subsidizing its industries, flooding the American market with goods to undercut American producers, and requiring so-called forced technology transfers from U.S. companies.  

However, the trade deficit the U.S. has with China isn’t expected to see much attention. This could negatively impact how much China is ultimately expected to import from the United States.

When it comes to colleges and universities, research-based collaboration, and artistic-based areas, relations are expected to be more friendly. However, when it comes to fighting China’s human rights violations, individuals or business entities might be targeted. Based on Vice President-elect Kamala Harris’ proposed Uyghur Human Rights Policy Act of 2020, there’s an expectation the Biden administration will keep the pressure on China.

Beginning in 2017, Biden began to discuss plans for America and how some of America’s crucial industries could be more self-sufficient and less reliant on China. Examples include pharmaceutical products, medical equipment, and rare earth minerals.

Potential actions the Biden administration could implement against China include sanctions; U.S. government-sponsored legal action against Chinese firms; and becoming more involved in the World Trade Organization (WTO) and similar organizations. This is seen by some as the U.S. becoming more in-step with Europe to better pressure China in WTO and related disputes. It might also include courting America’s allies in reducing or prohibiting Chinese investment of domestic industries to make it more difficult for Chinese firms to obtain cutting-edge technology.

While there is no way to accurately predict how the Biden administration will treat China, there will likely be continued pushback on China. How these actions will ultimately impact trade and the markets will be seen in the near future.

How Will the Biden Administration Influence the Federal Reserve?