New Year predictions last almost as long as New Year’s resolutions. A year ago, the Federal Reserve was forecasting four rate hikes in 2016 and Hillary Clinton was the favorite to win the presidency.
The unknowns for 2017 start with the tone set by Washington. Will investors see “good Trump” or “bad Trump”? Will Republicans repeal and replace ObamaCare?
On the economic front, will OPEC and allies carry out oil production cuts — and how fast will U.S. shale companies boost output? Tesla (TSLA) is supposed to begin deliveries of its Model 3, but the roads are getting crowded with electric vehicles. Apple (AAPL) hopes the iPhone 8 will wow consumers and revive sales. Snapchat is set to go public; will Uber and other big unicorns follow?
This new year may be as unpredictable as any, but here are 10 key issues and challenges to watch that will affect your investments and the economy.
1. Good Trump/Bad Trump
Donald Trump promises an ambitious agenda: a 15% corporate tax rate; repealing ObamaCare, Dodd-Frank and other regulations; and a $1 trillion infrastructure program. The U.S. economy has been stuck in second gear for years, with businesses reluctant to invest. The prospect of a Trump administration already has revived “animal spirits,” and the IBD/TIPP Economic Optimism Index and other business surveys show soaring confidence.
But the populist president-elect has a zeal for conducting ad hoc industrial policy in public. He’s used Twitter and TV to target United Technologies (UTX), Boeing (BA) and Lockheed Martin (LMT) as well as drug prices.
And his protectionist instincts could have serious consequences, given a president’s broad authority on trade. Trump could adopt a few anti-dumping duties on China, expanding on actions by Presidents Bush and Obama. Or he could withdraw from Nafta or trigger a full-blown trade war with China that roils the global economy.
So far investors are betting that Trump’s pro-growth, low-tax agenda will carry the day. Stocks have rallied strongly since Election Day. But some sectors — banks, steel, mining — have fared better than others.
2. Fed Plays Traffic Cop
Before the election, the Federal Reserve worried that slow growth had become a chronic condition for the U.S. economy. In 2017 the Fed will shift to the role of traffic cop, trying to keep the economy from blowing past its speed limit.
If Trump’s fiscal fuel sparks inflationary pressures, the Fed could raise rates by more than the three quarter-point hikes that the central bank is predicting. But a positive scenario could play out if Trump’s policies boost productivity, essentially raising the speed limit so the economy can drive faster without an upsurge in inflation.
The Fed will likely follow financial markets’ lead. In recent years, the Fed has spoken loudly but carried a Wiffle bat. Policymakers’ goal of four rate hikes in 2016 was whittled down to one quarter-point move at year-end, in large part due to concerns about global markets.
The Fed in 2017 will include two new Trump appointments to fill vacancies. Trump’s appointees may be especially open to the idea that his deregulation and corporate tax cuts can help revive productivity growth and increase labor-force participation. And by year-end Trump likely will nominate his choice for Fed chief; Janet Yellen’s term ends in February 2018.