CFO Focus: Tailspin or Economic Growth Ahead?

With the gross domestic product growth rate currently at 2.1% and unemployment at 3.6%, economists and presidential election prognosticators are wondering if the economy, particularly the stock market, will continue to grow. Or, are we headed for a bubble that might burst, sending the economy into a tailspin?

Indicators suggest there is room for further growth and a catastrophe is unlikely, at least not immediately. On the other hand, individual investors and the general public may not be feeling the love that has benefited big business. Here’s why:

1. The top 10%, the wealthy, owned 81% of all stocks and only 54% of families owned stock, either directly or indirectly as part of a fund and/or 401K plan.
2. There was a small correction of the stock market at the end of 2018 that led many investors to withdraw money from the market in early 2019. Because there was a quick recovery, many did not have the chance to get back in.
3. Active traders did not have the patience to stay in the stock market and missed the bull market of 2019. They sold their winning stocks too early and failed to take losses on stocks that lost.
4. Many experts talked about possible recessions in the last two years, due to trade wars and the fact that a recession was likely from an historical perspective. That caused some people to retreat from the market.
5. As a result, only buy-and-hold-long-term investors enjoyed the bull market of 2019.

Continuing to fuel the stock market will be new technology, specifically 5G, the latest generation of wireless technology for digital cellular networks, new energy sources for battery-driven cars, smart homes/cities/lives and driverless cars.
 
Everyone needs a PC and a smartphone. 5G has the potential to provide a new supply channel, generating additional demand in the cellular market and leading to new companies over the next 10 years, just as Microsoft, Apple, Amazon, Google and Facebook drove the last 20+ years. The global economy will continue to grow due to demand for these technologies and the expansion of the marketplace they will deliver.
 
A rise in inflation is not predicted, even though there has been scant inflation in the past 10 years. But the world economy needs the U.S. dollar to support it.
 
More than 50% of USDs are circulated outside the U.S. and may never return. The dollar is still the only global currency, and the number of dollars in circulation is increasing. But due to the increased trade deficit, the U.S. share of gross domestic product has remained the same.
 
The Euro and the Chinese Yuan may compete with the U.S. dollar in the long term. But short term, the dollar’s value remains solid because European Union countries do not share common goals and China’s political system is not stable, given its issues with Hong Kong, Taiwan, Tibet and Xingjian.
 
The absence of a recession during the past 10 years can be attributed to the fact that the business cycle has been expanded in the global economy. As a result, cyclical unemployment has declined, as has frictional unemployment (that caused by people moving from one job to another) because more real-time information is available online.
 
The global economy has plenty of room to grow for both developed countries with new technology and those playing supportive roles—a set of conditions the world has never experienced before.
 
More traditional ways to evaluate the stock market may no longer be valid; the stock market value to GDP ratio has been “significantly overvalued” (by more than 115%, for more than six years).
 
Here’s what seems likely:
                                                   

• The growing global economy has expanded business cycle and postponed the possibility of recessions. (Theoretically, recessions are mainly caused by cyclical unemployment.)
• Lower interest rates will make investment in the stock market more attractive.
• A new super cycle based on 5G technology will expand the global economy, which will move aggregate supply to the right, according to the neo-classical economists’ argument. The super cycle is in its early stages, comparable to the IT industry of the 1990s.
• The global economy needs the U.S. dollar as a global currency to provide credit support, as the U.S. is still the most stable nation in the world. QE1, QE2, and QE3 (the Fed’s quantitative easing) increased money supply for the global economy, rather than just the U.S. economy.
• The Wuhan Coronavirus is a single incident and will not have any impact in the long term.

Tenpao Lee, Ph.D., is an economics professor at Niagara University.