By: Faith Doyle, MBA, CFP® Financial Advisor Associate at Webb Investment Services, Inc.
What a ride it has been! This time last year we were dealing with many uncertainties; a full-on trade war with China, a government shutdown, interest rates on the rise due to Fed tightening, and worries of a broken credit market1. That was a lot to wash down with your eggnog. But with all this turmoil and global monetary easing, the US Fed began to pivot and lower interest rates again. The result… a year of stellar returns in the equity and bond markets2. Fast forward a year and there was not as much to worry about until the New Year’s drone strike in Iran and the raised tensions in the Middle East. So, what is on everyone’s mind?
The number one question is when is the next recession going to strike? We are in fact in the largest expansion ever, it seems natural to ponder when will it end? Many analysts predict that it is unlikely to happen in 2020, even though this expansion seems to be “long in the tooth”, economically speaking, some suggest this cycle is more “middle-aged”1. The housing market has always fallen before a recession, but as of now housing starts are going up and this is largely due to the fact that interest rates are very low1. From a global standpoint many previously unknown factors that were increasing recession risks have diminished; global economic easing has increased, the US reached a trade truce with China, Brexit is indicating orderly prospects slated to take place at the end of January 2020, and the global markets show early signs of a rebound, indicating global growth2. All of these factors indicate a lengthening of time to recession2.
Although we may avoid a recession in 2020, the risk of a recession is likely to increase2. All of the US and global quantitative easing has helped us avoid a recession, but it leaves little room to maneuver when we have more recession threats. The Fed and European Central bank have used most of their dry powder when it comes to monetary policy, namely the ability to lower rates. They still have fiscal policy in their quiver, they can affect the money supply with their ability and willingness to purchase government bonds to stimulate the economy. The biggest issue with relying on fiscal policy to save us from a recession is the government’s ability recognize it and react in a timely manner, as political processes are slow moving2.
Other themes for 2020 include inflation, housing growth in the US, slowed global growth, and lower market returns. Inflation is expected to stay at 1.5-2% through the election, but then creep up to 2-2.5% due to the effects of the stimulus around the world, wage pressures, easing of the trade war, and rising inflationary expectations1,2.The housing market is expected to be an area of strength for the US this year and beyond, mortgage rates have declined, credit score requirements have eased, and the excess has finally been absorbed leading to demand for new builds2. Global growth should outpace US growth this year, but all will be at a slower pace, the US has had several years of outperformance in economic growth, earnings growth, and fiscal and monetary policy2. 2020 is predicted to give lower returns than the previous years, we have had a few double-digit return years back to back, this is in part due to deregulation of corporations and the tax act. We are not expecting the same returns as we have the last few years, and we do expect volatility to increase2.
In 2020, volatility will be more present than in the past few years. It is not unusual to have 4 for more market drawdowns in excess of 5% during any calendar year. Several factors include geopolitical issues and national politics around the globe2. The US and China are in Phase 1 of a trade deal, but progress could easily shift. The US Presidential elections may cause responses in the markets. There has been unrest and protests against the governments in several Emerging Market countries as their economies have downshifted2. In addition to politics, there could be potential cracks in the corporate credit cycle, vulnerabilities in the riskier segments could lead to increased volatility and potential recession2.
There are so many factors that may prove to make 2020 an interesting year in the markets and in the headlines. It is important to remember that having a plan that is relative to your time line, to your goals and risk tolerance is increasingly valuable in times of market turbulence. Understanding how cash flow is generated in your portfolio and how that relates to the overall market is also important. The ride that you are witnessing in the headlines, may not be the ride your portfolio is experiencing, and that should help to ease your day to day concerns. Please let us know what questions you may have.
- Seven Marco Themes for 2020 PIMCO. pimco.com/en-us/insights/economic-and-market-commentary/cyclical-outlook/2020/01/seven-macro-themes-for-2020
- Bob Doll 2020 Predictions. https://www.investmentnews.com/bob-dolls-10-predictions-for-2020-176085
Any opinions are those of Bob Doll and not necessarily those of Raymond James. Expressions of opinion are as of this date and are subject to change without notice. There is no guarantee that these statements, opinions, or forecasts provided herein will prove to be correct. Investing involves risk and you may incur a profit or loss regardless of strategy selected. Past performance does not guarantee future results. Future investment performance cannot be guaranteed, investment yields will fluctuate with market conditions. Prior to making an investment decision, please consult with your financial advisor about your individual situation.
Certified Financial Planner Board of Standards Inc. owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER™, CFP® (with plaque design) and CFP® (with flame design) in the U.S., which it awards to individuals who successfully complete CFP Board’s initial and ongoing certification requirements.