As we end another year (and decade), it’s time to take a look at what 2020 might hold for us all. Yes, we know there’s an election of some sort pending. And yes, the 11-year recovery continues to defy the smartest guys on Wall Street, once again proving our axiom that the future short-term direction of things is fundamentally unpredictable. Because we tend to get a bit long-winded in these forecasts, here’s a quick bullet point briefing from our friends at JP Morgan for those who wish to get back to watching college bowl games or returning Aunt June’s gift for store credit:
- The US has returned to slower growth, but should avoid recession in 2020.
- Overseas economies should see modest improvement as trade tensions ease.
- The Fed may leave rates unchanged in 2020, but other central banks are still in easing mode.
- Modest U.S equity gains should be built on somewhat higher earnings.
- International equities should outperform in the long run, but will be challenged as long as trade tensions persist.
- Market volatility may pick up as the Presidential Election nears. Investors will need to be diversified and should avoid letting how they feel about politics govern how they think about investing.
- While Congress is embroiled in the catfight of the century, they somehow managed to pass the SECURE Act, which impacts how investors will be able to pass along retirement assets to heirs among other changes.
There. You can get back to your holiday distractions now if you like – but we would encourage you to read on. Here we go:
US Economy: Steady Growth Following a Soft Landing
In 2020, the economic expansion should enter its 12th year. The US economy downshifted from 3% growth to 2% growth without falling into a recession. Continued low inflation and low unemployment, coupled with a rise in wage growth are all significant positives. However, from an investment perspective, things aren’t exactly ideal. (They never are.) Slow economic growth and rising wages will put pressure on corporate earnings, and already low interest rates will challenge returns in the bond markets going forward. The strongest part of the US economy should continue to be consumer spending. All of this should lead to continued economic growth, but at the same plow horse pace we’ve seen over the past few years. If you’re inclined to try and read the tea leaves as the year progresses, we suggest you watch consumer spending, job growth, interest rates, and the ongoing trade negotiations for clues. These are leading indicators of the health on the economy.
A final word on this: We are certainly closer to the end of this business expansion than the beginning of it. Sooner or later, we’re due for a recession. But recall from your high school economics class that cyclical recessions are normal, natural, and necessary. They are typically short, averaging perhaps three quarters of negative growth before the economy starts to grow again. Given the lower-than-average growth rate of the US economy since 2008, a normal recession would be far less unpleasant than the past two we’ve experienced. (The 2000-2002 recession and the 2008 recession were both caused by event shocks, not normal economic contraction and expansion.) Bottom line: If we do experience a recession in the next 2-3 years, and it’s caused by normal economic events, it would likely be far less painful and a bit shorter than the past two. The last “normal” recession we experienced was in 1990 and lasted less than three quarters. We’ll keep you posted as the year unfolds.
Presidential Elections, Impeachments, and Other Distractions
Much of this year will be spent handicapping the November election, both with regard to the race for the presidency and the control of Congress. We are quick to remind long-term investors that confusing your feelings about elections with how you think about your investments can lead to big mistakes. Here’s a handy little chart reflecting how markets have performed on average leading up to and after past Presidential elections since 1992:
In sum, markets tend to get a little choppy in election years as candidates battle for the nomination and then ultimately the presidency. But over the longer term, history reflects election cycles have little impact regardless of your political leanings. We will be watching the election circus closely and update you in our quarterly reviews.
International Economy: Some Improvements Likely as Trade Tensions Ease
With few exceptions, international economies have not fared as well as the US during the entire recovery. Challenging demographics, political instabilities, trade tensions, and uncertainty around Brexit are all contributors to their slower growth record. Leaders in Europe and other developed countries continue to keep interest rates artificially low and it seems to be working as the major developed economies continue to plod along. If the dollar stabilizes or weakens a bit in 2020, US-based investors would avoid the currency headwinds that have eaten into international returns in six of the last seven years, including 2019. We maintain a modest allocation in international markets and expect to continue to do so for diversification purposes.
US Markets Expectations: Stocks and Bonds
If you’re a new reader, be advised: We do not make market predictions. Never have and never will. But we do study the data for clues. Here’s a few talking points upon which you can reflect:
US equities had a solid year in 2019. The S&P 500 is up a bit more than 27% as of this writing. To an extent, this was largely due to its starting point, as US equities sold off heavily at the end of 2018. Don’t expect 2020 to be a repeat. While corporate earnings continue to grow, the pace of growth has slowed meaningfully – at least for now. All things considered, US equity markets are expected to grind higher, but downside risks are building. Keep an eye on quarterly earnings if you’re inclined. Above all, they determine future short-term market momentum. But set your expectations for US equity growth lower than 2019.
Let’s move on to bonds. After a challenging 2018, fixed income markets caught a break in 2019. The US 10-year Treasury yield fell from 2.7% to 1.8%, vexing every major economist, all of whom who forecasted rising rates. (Remember – economists have forecasted 14 of the last 9 recessions. Ahem.) This rate decline rewarded those who maintain diversification with healthy returns in fixed income. The Barclay’s Aggregate Bond Index (the main yardstick for bonds) is up 8.64% as of this writing – quite a welcome surprise given expectations for rates last year. Going forward, the low interest rates will make it difficult (if not almost impossible) for bond managers to repeat their performance again this year. Thankfully, the Fed plans to stand pat on interest rates in 2020, which will likely provide some stability. But just as in stocks, investors should not expect a repeat of the stellar performance of their bond portfolios and instead expect more modest returns from bonds for the foreseeable future.
In sum, our expectations for investment markets are cautiously optimistic, but somewhat muted compared to 2019. With 2020 poised to be potentially bumpier due to the election cycle and geopolitical unknowns, it is more important than ever for investors to adhere to the tried-and-true investing principles of diversification, patience, and discipline. They’ve served us all well in the past, and we expect them to continue to do so in the future.
Well, this concludes our 2020 Outlook – for now. We’ll be back with updates at the end of the first quarter. As always, please don’t hesitate to call us if you have any questions at all regarding the economy, markets, or your investment plan. We’re here to serve you.