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The markets have seen their share of good and bad news in 2019. On the positive side, this expansion became the longest on record. But slowing economic growth and ongoing trade tensions represent potential headwinds.
What can investors expect in 2020? Here are four key questions regarding our outlook:
Investors have been wondering if there will be a recession in 2020. Central to that view is whether consumer spending is showing any signs of fraying.
The consumer has been a resilient driver of this economic expansion. Trade tensions, slowing growth, political challenges, lackluster wage increases and sluggish business investment have all failed to put a dent in consumer spending.
On the plus side, the labor market, which is a key pillar of consumer strength, is healthy. Job gains are leveling off, but the unemployment rate is near historical lows, and wages are growing modestly but still above inflation. Interest rates are low, keeping the cost of credit affordable. All of this means consumers can likely keep spending even as overall economic growth slows in 2020.
Still, there are looming rain clouds in an otherwise sunny forecast:
Currently, benchmark lending rates are below 2%. Investors will be closely following the Federal Reserve in 2020 for signs of a shift in policy that could raise or lower this rate even more.
Just how low rates will go – and how long they’ll stay that way – will depend on how fast prices rise in the new year. Inflation below the Fed’s target of 2% could signal more stimulus is needed. A pickup in inflation could suggest the Fed is likely to stay put or even raise rates in the near term. With the rest of the world slowing and global rates very low or even negative, even as rates fluctuate, they will likely stay within low ranges for some time to come.
We think it’s unlikely we’ll see negative rates in the U.S. anytime soon. For one, we expect the U.S. economy to continue to grow modestly next year. Also, the Fed has other preferred tools – such as asset purchases, for example – to boost the economy if needed.
Global growth slowed from 3.7% in 2017 to an estimated 3% in 2019. However, there is reason to expect growth to stabilize and then improve in 2020:
On the flip side, China, the world’s second-largest economy, is experiencing decelerating growth the past several years due to banking sector reforms and an economy that moved from export-driven to consumer-led. China’s ability to successfully stimulate its economy, despite headwinds from trade tensions and its burgeoning domestic debt, could be the “X factor” for global growth to rebound this year.
The presidential election will dominate headlines in 2020 as new candidates and policies rise to the forefront, while a looming impeachment process adds to the political uncertainty.
Our best advice to investors is this: Don’t play politics with your portfolio. History shows that economic and corporate fundamentals matter more than politics.
But market reactions to leadership changes are hard to predict, even if we think they’re likely to be short-lived. Policy changes to taxes, tariffs and regulations, for example, can affect market sentiment far in advance of any positive or negative effects such policies may have on the overall economy. Moreover, plans introduced on the campaign trail tend to change a great deal as they move through the democratic process. Because of this, we caution against changing your portfolio in response to them.
Investing over the long term requires managing uncertainty rather than removing it. We recommend you prepare for normal market swings by staying diversified in quality investments and maintaining a mix of equities and bonds that’s appropriate for your situation. This can help keep your portfolio growing in 2020 and beyond.
This information is for educational and illustrative purposes only and should not be interpreted as specific investment advice. Investors should make investment decisions based on their unique investment objectives and financial situation.
Diversification does not guarantee a profit or protect against loss in declining markets.
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