Four Ways That 2018 Could Be a Turning Point
(Bloomberg View) -- As 2017 draws to a close, the least surprising thing on Wall Street is seeing strategists forecast that next year will look more or less like this year. I respectfully disagree.
In the economy, in monetary policy, in the technology sector and in politics, 2018 could be the most consequential year of the decade, just as 2008 was to the 2000s.
First, the economy. Since 1970, the only years that finished with an unemployment rate lower than October's 4.1 percent were 1999 and 2000. Those two years were followed by the bursting of the technology bubble in 2000 and the recession of 2001, with major corporate scandals like Enron's. This isn't to say that a replay of either 2000 or 2001 is in the cards, but what we know is that the modern era has very little experience with unemployment this low. Next year is setting up to be one of the best environments for workers in the past 50 years. Beyond its impact on wage growth and inflation, we should not underestimate the dynamic this will have in the economy and society heading into the midterm elections.
And how's the Federal Reserve going to respond to this labor market? Especially as the Fed itself is struggling with vacancies and inexperience? Assuming he's confirmed by the Senate, Jerome Powell will take over leadership of the Fed in a few months. One of the board members on the Fed, Randal Quarles, just started. There remain four other vacancies on the Fed's Board of Governors. The president of the New York Fed, William Dudley, will be replaced next year. Atlanta's new president, Raphael Bostic, will be a voting member next year. The Richmond Fed president gets a vote next year too, and that seat remains vacant. In a normal year, perhaps all these vacancies and this inexperience might not be a concern, but with the yield curve flattening as much as it has in recent weeks, perhaps inverting at some point in 2018, the bond market is signaling changes in the economy that have historically led to more challenges for policymakers.
The coming 12 months may turn out to be a year of reckoning for the technology sector as well. Perhaps no company has epitomized the halo effect for tech in society this decade better than Tesla with its iconic leader, Elon Musk. Yet it's no secret that Tesla is burning a tremendous amount of cash. And while Tesla and Musk remain focused on the distant future, it's arguably "put up or shut up" time for the company as it struggles to produce its mass-market vehicle, the Model 3. Should production delays continue to plague the Model 3, and as competing electric vehicles hit the market, Tesla may find markets less willing to fund the company.
Another tech company that has epitomized the era is Uber, which has promised an initial public offering by 2019. The closer we get to that date, the more scrutiny there will be on its financials, business model, corporate governance, and battles with regulators. Should any of that disappoint, or if its valuation ends up being far less than what it has achieved in previous rounds of private market financing, it could create spillover effects in the startup and venture capital world.
And then in politics we're looking at the first midterm wave election since 2010. All the information we have is pointing to a Democratic wave. Whether it's special election results, the results in Virginia's elections, presidential approval ratings, or generic ballot polling, it's all saying that Democrats are going to do very well in 2018. Should Democrats win one or both chambers of Congress, Capitol Hill is likely to become far more interested in investigating President Donald Trump. And what sort of legislation will emerge from a Democratic Congress? The nation has watched Republicans achieve little to nothing this year, but their counterparts may prove more united and effective.
Next year may bring the hottest labor market in 50 years, an inexperienced Fed navigating an overheating economy and an inverted yield curve, a crisis of confidence in the unprofitable futuristic technology sector, and Democrats retaking control of Congress. That won't feel like "more of the same."
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Conor Sen is a Bloomberg View columnist. He is a portfolio manager for New River Investments in Atlanta and has been a contributor to the Atlantic and Business Insider.
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