Economic data and corporate profitability both seem to indicate that a lower growth rate may lie ahead for 2020, while a number of major, but non-market, events could be setting us up for a period of heightened uncertainty. This low-growth period could be accompanied by increased volatility, both widening the potential range of outcomes as well as the probability of outlier events.
In economic data, recent measures of the outlook for both manufacturing and service industries appear to show weaker patterns in recent months, which if they persist could indicate about a 1.5% GDP growth rate for the next year. That compares with approximately 2.9% in 2018 and perhaps a run rate of about 2% this year.
Complicating the economic story in our opinion are global and political tensions. At the top of any list is the ongoing US-China trade tensions. Regardless of merit (and few in the West doubt the veracity of US concerns over intellectual property rights in the trade talks), we do not expect any immediate progress on trade. The US is in a somewhat of a bind here and there is no likely escape. Mostly this is likely because the mood in China is not one for concessions. To the extent that US demands include Chinese policy toward Hong Kong, Beijing is not ready to negotiate, as it considers this an internal matter. Further, the Chinese may have decided that the US is currently a capricious and unpredictable negotiator, and they may be simply waiting for the presidential election results.
At the same time, the pressure exerted on China by Hong Kong is existential and, in Beijing’s eyes, must be suppressed. While this plays out, a smaller level of exports to the US is likely seen as a small price to pay. Meanwhile, we believe that the Chinese will let the domestic policy stimulus they have put into effect over the last year take its course.
The US is not only fully amidst a presidential campaign, with all the noise that generates, but the House of Representatives is actively seeking to remove the current occupant of 1600 Pennsylvania Avenue. This could mean 13 months (or more) of chaotic uncertainty.
In our opinion asset values will be supported by a Federal Reserve that sees the economy as being in a “good place”. Certainly, Fed Chair Powell’s comment to this effect was justified, as it was delivered on the same day the unemployment rate was announced at about 3.5%, the lowest in 50 years. Powell went on to say that “[the Fed’s] job is to keep [the economy] there as long as possible”, which sets up their task in the not too distant future to lower interest rates again. This is what the markets expect, and such a move will likely be supportive of both bond and equity prices.
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