Thanksgiving is here and gone and somehow, we already find ourselves in December after a whirlwind year of remarkably strong market returns, vacillating geopolitical drama, monetary policy reversals and ever-intensifying US political dynamics. Rampant midyear speculation of an impending recession has faded from the headlines (for the time being) with many major equity markets nearing all-time highs and broad economic data starting to recover. People naturally want to know, “what does the future hold for investors in the year 2020?”
We make no claim to have a better crystal ball than anyone else, but we are confident in the institutional research and toolsets that we employ at Capital Planning Advisors. The midyear turnabout in Fed (and other global central bank) policy from tightening to loosening is an incredibly powerful tailwind for a continued, albeit slowing, expansion. We have yet to see a near-term economic based catalyst for a 2020 or even 2021 recession as liquidity remains plentiful, employment and confidence continue to remain strong and inflation remains moderate.
Figure 1: History suggests that stocks tend to rally after third rate cut
Source: Ned Davis Research
The resumption of monetary easing has translated into nascent signs of improvement across the globe, importantly in purchasing managers’ indexes (PMIs), which have a strong predictive relationship to global economic and corporate earnings growth.
Figure 2: End of the 2019 economic soft patch?
Source: Cornerstone Macro
Of course, the path forward is not as clear as anyone would like, and the “Big Three” geopolitical risks remain: US-China trade talks, Brexit and the US Presidential election. What makes forecasting 2020 so particularly challenging is that each of these outcomes is binary in nature and inherently impossible to predict. Fortunately, we may be nearing some positive short-term resolution to the trade negotiations that could serve as additional support for equities and other risk assets as we head into the New Year.
Figure 3: Trade uncertainty is starting to recede…for now.
Source: Cornerstone Macro
As professional investors, we are tasked with providing our clients prudent exposure to growth opportunities while reasonably mitigating any excessive risks that invariably come along with them. We continue to lean on tried and true techniques of asset allocation and global diversification in this hazy environment. Throughout 2019, we have introduced new themes such as innovation and additional asset classes such as real assets, alternatives and private capital to help position our clients for the years ahead.
Our research suggests that 2020 should bring mid-single digit equity returns, 10-year bond yields hovering around 2%, persistently strong labor and housing markets and moderate levels of inflation. We expect monetary policy to remain accommodative and ultimately a positive resolution to the current trade discussions. Of course, much of our market outlook will ultimately depend on the November elections, which we will continue to monitor closely.
Figure 4: What history says 2020 should look like
Source: Ned Davis Research
As we close out 2019, we would like to thank you for your continued support of our Capital Planning Advisors’ team. Thanks to you, our firm continues to grow and thrive, and we are pleased to have added our 12th team member so that we may serve you with even greater capacity than before. Please contact your relationship manager if you have any questions or if we may be of further service. We wish you a joyous holiday season and a prosperous and healthy New Year!
