Presented by Roberta L. Nestor
As we made our way through 2019, signs of softening economic conditions became increasingly apparent, even while consumer confidence remained high and job growth came in better than expected. Now, as we look ahead to a new year, the path is somewhat unclear. Will the economy continue in slow-growth mode? Or will we see the recession many media and industry pundits have warned about?
|By the Numbers: 2020 Expectations
• GDP Growth: 1.25%–1.75%
• Inflation: 1.5%–2.0%
• Federal Funds Rate: 1.25%–1.5%
• 10-Year U.S. Treasury Yield: 1.75%–2.25%
• S&P 500 Index: 2,900–3,200
The course 2020 takes will depend on how the overriding trends evolve. The risk of recession is real, but we’ve been in similar situations during this decade-long recovery, only to see the economy continue to grow. That continued growth remains the base case for several reasons.
The economy today looks a bit slower than it did a year ago. Consumers are still spending, but businesses are investing less. Government spending growth should continue, but it is unlikely to accelerate. Trade is not likely to be an additive force, and it might well end up as a drag. These factors should leave growth slightly slower overall for 2020, at around 1.25 percent to 1.75 percent.
The Fed’s Monetary Policy
The real monetary policy story of 2020 is likely to be that there is no story. With slower economic growth, and with inflation around 1.5 percent to 2 percent, the Fed may institute more rate cuts. This would leave the federal funds rate in a range from 1.25 percent to 1.5 percent by year-end 2020. In turn, the 10-year U.S. Treasury yield would be around 1.75 percent to 2.25 percent. Of course, in the case of a recession, the Fed would likely take a more active stance.
A growing economy and a supportive monetary policy should support global stock markets, leaving them to trade on fundamentals. Revenue growth remains healthy, consistent with continued strength in consumer spending. Strong revenue growth should also support growth in earnings.
The International Story
If the U.S. is likely to continue its slow growth path, what about international economies and markets? From a market perspective, valuations are generally cheaper abroad, which could lead to international markets outperforming those in the U.S. We’re already seeing signs of this outperformance. That said, there are risks on the international front. The trade war, if not resolved, will continue to weigh on global growth and markets, as would a U.S. recession. International markets are likely to deliver both higher reward and risk than U.S. markets in 2020, although results will be primarily dependent on what happens here.
What About a Recession?
The predictions above assume continued slow growth and steady markets. But if we do get a recession, what would it look like?
To start, it’s very unlikely to be as bad as the Great Recession of 2008. Current high employment levels and wages should keep consumer spending (at two-thirds of the economy) healthy, even during a downturn. Business spending is already flat. Government spending growth, meanwhile, should act as a cushion. In other words, a recession will probably be more of a deep slowdown than a collapse.
More of the Same
The past year was eventful, particularly in terms of political risks. The fundamentals are weakening, but the most likely outcome is continued slow growth. Even if growth becomes muted (both here and abroad) or any other issues (known or unknown) emerge, the underlying strength of consumer spending should limit the damage. And if we do get a recession? The impact is likely to be much milder than many of us fear.
Overall, 2020 looks likely to begin with more of what we’ve seen so far in this expansion—just slower. Despite the rising risks, which have the power to change things quickly, this is not a bad place to be.
Certain sections of this commentary contain forward-looking statements based on our reasonable expectations, estimates, projections, and assumptions. Forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. Past performance is not indicative of future results. All indices are unmanaged and investors cannot invest directly into an index. The S&P 500 Index is a broad-based measurement of changes in stock market conditions based on the average performance of 500 widely held common stocks.
Roberta L. Nestor is a financial advisor practicing at 491 New Haven Avenue in Milford, CT offering retirement, long term care, investment and tax planning services. She offers securities and advisory services as a Registered Representative and Investment Adviser Representative of Commonwealth Financial Network – a member FINRA/SIPC and a Registered Investment Adviser. Fixed insurance products offered through Nestor Financial Network are separate and unrelated to Commonwealth. Commonwealth Financial Network or Nestor Financial Network does not provide legal or tax advice. You should consult a legal or tax professional regarding your individual situation. Roberta can be reached at Nestor Financial Network, 203-876-8066 or firstname.lastname@example.org. Authored by Brad McMillan, CFA®, CAIA, MAI, managing principal, chief investment officer, at Commonwealth Financial Network®.