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"If you don’t like the weather here, wait five minutes and it will change."

Attributable to Mark Twain who purportedly was referring to New England, that famous phrase has become so ubiquitous that most people associate it with their own locale regardless of where "here" is. Moreover, the expression has been colloquially used to discuss things beyond rapidly shifting weather patterns.

In particular, Twain’s popular idiom could be used to characterize the financial markets over the past several years. For instance, 2017 was a banner year for risk assets as stock prices around the world posted gains of roughly 20%. The rally reached a fever pitch in January 2018 when stocks rose 7% in that month alone. Stocks then cracked like a thunderclap, drifting sideways in the ensuing months before reaching new highs that fall, only to fall sharply again in the fourth quarter.

By year’s end, nearly every asset class excluding cash fell in 2018; there were few places to hide. As the calendar turned to 2019, however, stocks resumed their ascent and are now poised to post another year of double-digit gains. Although the gains recorded this year are less homogeneous than in 2017 (US markets have considerably outperformed their international peers), 2019 could be described as the mirror image of 2018: Nearly every asset class has risen. In short, if you don’t like the markets, wait five minutes for them to change.

Given what some might describe as the on-again/off-again nature of global equity markets, it’s reasonable to ask, "What should investors expect in 2020?" When answering, it’s important to recognize that there were two major forces behind the volatility that occurred from 2017 to the present: monetary policy (initiated by the Federal Reserve, or the Fed) and trade policy (initiated by President Trump).

In our soon-to-be-released 2020 Economic and Investment Outlook, we review each of these in detail. Given their significance, we summarize our views on both monetary policy and trade policy in the following:

In 2019, the Fed altered its policy and lowered interest rates three times, a mere nine months after it had last raised them. Other global central banks were also in an easing mode, which was arguably one of the primary drivers behind this year’s stock market gains and the easing of recessionary fears.

The Fed is now conveying its intent to remain on hold until a fundamental reassessment is warranted. In light of that, we expect that monetary policy will not be as volatile as it has been the last few years. This should generally be supportive of equity prices.

That said, we should remain attentive if conditions concerning economic growth and inflation change and a reassessment by the Fed is warranted. While each is currently neither "too hot" nor "too cold," we need to remain attentive.

Trade policy may also be less volatile relative to 2018 as evidenced by news late last week that the long-rumored phase one deal is taking shape. As we have stated previously, however, we do not believe that the US and China will reach a lasting peace. Both sides are deeply divided on several "existential issues," which increases the complexity of the negotiations and decreases the odds of a meaningful resolution.

While risks have abated and it is a clear positive that some tariffs will not be enacted and others will be reduced, there is precedent for believing that reversals are possible: Tariffs can be raised as easily as they can be lowered. We are thus more cautious on this front.

In summary, our overarching view for 2020 may best be described as "Muddling Through." We expect economic growth to continue to hover near its recent trend of +/- 2%. Inflation will also likely remain range-bound as we believe that labor shortages may trigger some short-term whiffs of inflation even as longer-term secular disinflationary pressures persist.

After a year in which earnings growth was non-existent and stocks were buoyed almost entirely by multiple expansion, we expect some earnings growth to materialize in 2020 as the economy continues to expand. US equities are therefore capable of notching further gains, although we urge investors to reconsider international equities. Foreign stocks are not only cheaper but possess more cyclical characteristics that would prove beneficial amid the backdrop of de-escalating trade tensions and modest economic growth.

Fixed income assets are not expected to deliver a repeat performance in 2020 and generate near-double-digit returns as they have done in 2019. But we continue to view bonds as an important stabilizer within a well-diversified portfolio along with other strategies that are tailored to suit investors’ preferences and risk tolerances.

Markets can and do behave erratically and are often as unpredictable as the weather. In any case, it is important to maintain a bright disposition while having a plan to deal with inevitable rainy days. The outlook for the year ahead is partly sunny along with the always-possible chance for some unexpected atmospherics along the way.

For more information, please contact your Key Private Bank Advisor.

Publish Date: December 17, 2019.

Any opinions, projections or recommendations contained herein are subject to change without notice and are not intended as individual investment advice.

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