2019 was a remarkable year! Now the burning question becomes what will 2020 bring? Will we see more of the same or will we see a significant shift in the economy. Is there a recession on the horizon or a major stock market pullback? No one knows exactly what will happen in 2020, but it is helpful to take an inventory of the existing situation, and the current direction of the economy and market.
GDP and the Economy
The U.S. economy remains strong and economic growth is expected to accelerate in 2020. Economists predict U.S. GDP growth will increase from 2019’s 2.3% to 2.5% in 2020, largely on the back of increased consumer spending. Indeed, the U.S. consumer remains in a very strong position with low unemployment and rising wages, increasing consumer’s spending power and fueling growth. Productivity is also increasing as rising wages forces companies to invest in capital and training.
Inflation and Interest Rates
Inflation has been largely dead since 2008, and 2020 is expected to be more of the same. Despite easy money policies by the Federal Reserve, inflation is expected to remain below 2%. This is good news since it implies that the Federal Reserve should be able to remain on hold, and economists expect no interest rate increases at least until the election. Basically, 2020 should be a continuation of the existing Federal Reserve policies that are supportive of growth and stock prices.
Politics
2020 is likely to be just as contentious as 2019 when it comes to politics. Of course, given that it is an election year there is significant uncertainty over who will win the White House in the fall, and this could impact stock markets. Political outcomes are notoriously difficult to predict (just ask the pollsters from the last election), but we believe that the checks and balances in the U.S. system of government will prevent dramatic shifts. The market seems to believe the same and thus far seems unfazed by the presidential election.
Geopolitics
Geopolitically, we have already had one major confrontation with Iran, but it is very likely that tensions will ease in 2020, even beyond the levels we saw in 2019. Not only has Iran seemed to back down, but tensions are easing with China as the trade war cools somewhat with a phase 1 trade deal. You may recall that trade tensions in China weighed heavily on global trade in 2019.
What could go wrong?
There are things to worry about of course, as there is always a chance of recession. One concern is that investors are reaching for yield by lending to risky companies, and a small pullback in the market could result in a wave of bankruptcies.
Another concern is simply that investors are no longer fearful, and stocks could rise too fast, setting the stage for pull back. We may already be experiencing some of that rise, as the stock market hits new highs.
So, there it is: a view for 2020! May you have a wonderful year!