2019 proved to be a year full of surprises. Trade wars and a global manufacturing decline weighed on the global economies in 2019, although interest rate cuts and resilient consumers provided a positive stock market outcome.
The question heading into 2020 is: What may tip the scale?
Will ongoing trade uncertainty and weakened manufacturing hurt job growth, finally dragging down the services and consumer side of the economy? Or will interest rate cuts and a resolution of the trade war spark a fresh round of global economic growth?
- The U.S. economy will likely remain split in early 2020, with manufacturing and business investment still struggling amid trade uncertainty but services activity and consumer spending healthy.
- A preliminary U.S.-China trade deal might stabilize corporate confidence, but a strong business investment environment likely requires a comprehensive trade deal.
- A global recession could occur if the manufacturing slowdown spreads to jobs and consumers.
- The Fed’s 2019 rate cuts should support the economy and stocks, although the cuts are only a partial cure for what ails manufacturing and corporate profits.
Investing in 2020:
I have an increasing concern that equity prices may be out of line with corporate fundamentals (profits).
Although the stock market continues reaching record highs, companies are making less than they did five years ago, so this performance is largely driven by Price/Earnings (P/E) expansion. The gap between the S&P 500 and corporate profits hasn’t been this wide since the Tech Bubble in the late 1990s, another period when the S&P 500 had strong gains despite stagnant earnings.
Source: St. Louis Fed, Yahoo Finance
Risks I am watching:
- Geopolitical risks – recently heightened by the US action in Iran
- Election year – always creates uncertainty and therefore volatility
- Global Trade relations – do the US & China strike a deal, do the US & Europe have a trade dispute, does the UK leaving the EU create problems in Europe.
I hope this note provides useful information. Please feel free to share it with family and friends.
January Calendar of Events (comments and additions for future months are always welcome)
- January is National Blood Donation Month. Let’s all give a pint to help another.
January 5th My granddaughter Isys turns 14. I must be getting old.
January 10th My better half, Eloise’s birthday.
January 15th 10th anniversary of my independent practice – thank you to all my loyal clients.
January 20th Martin Luther King Day. Let’s pray for more racial tolerance and understanding.
Sources: Schwab Investment Management, CNBC, Yahoo Finance
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