Market Updates

The powerful rally in equities to close out 2019 was a mirror image to the precipitous selloff to end 2018. Headwinds ranging from tight monetary policy, to fears of an earnings recession, to trade uncertainty and slower global growth all began to fade as U.S. equities rallied to new all-time highs in what was the strongest year for the S&P 500 since 2013.

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A gradual improvement in global manufacturing and trade growth appears increasingly likely in 2020. The bull market in equities rumbles on, supported by a number of variables, including monetary accommodation from the world’s top central banks, a trade truce between the U.S. and China, and reflationary fiscal measures in some of the world’s largest economies.

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The global economy is transitioning to a new mix of economic policies that are more favorable to national rather than global growth. Last week’s general election in the United Kingdom produced a big victory for the ruling Conservatives. The response from investors was positive, with the local UK equity market rising on the result and the pound building on its gains of the past two months.  

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A fundamental change in the Federal Reserve’s (Fed's) approach to achieving its inflation target means monetary policy is shifting from a headwind to a tailwind in 2020. The pattern of the U.S. business expansion over the past 10 years shares many similarities to the previous longest expansion in the 1990s. Like that episode, we believe the end-phase before the next recession could include a run-up in equity values way beyond historical norms.

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While some transient increases in initial claims and a modest rise in unemployment are possible in a lagged response to past Federal Reserve (Fed) tightening, unusually high uncertainty during the past four years has restrained investment and consumer spending, keeping real gross domestic product (GDP) below potential. This current lack of overheating still evident in below-target inflation makes a recession unlikely in 2020, as more accommodative policy bolsters demand back in line with potential, keeping unemployment around 50-year lows.

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While the macro trade data don’t suggest much pain or ill effects from U.S.-China trade tensions, state trade export data suggest otherwise, especially among many key battleground states. in a few key political swing states like Wisconsin, Florida, Pennsylvania and Michigan, the export picture is vastly different from the national figures.

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Investors are always looking for the best new idea. From a top-down perspective that means finding the countries with the most supportive innovation ecosystems and then digging deeper into sectors, industries and individual companies. The U.S.-China technology and trade conflict has brought two contrasting innovation ecosystems front and center as the countries race for economic supremacy. The stakes are high because both regimes believe whoever wins the innovation/technology war will win the economic war and will be in a stronger national security position.

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The swing in the U.S. from a major crude-oil importer to an almost-self-sufficient top producer has crowded out less-reliable exporters and greatly increased the security of supply, helping keep oil prices in check despite heightened geopolitical tensions and various supply curtailments this year. In our view, ample supply should also keep oil prices relatively stable in 2020, supporting our outlook for a global economic rebound.

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The hallmark of this record-long economic expansion has been recurrent fears of a relapse into the debt-deflation abyss of the 2008 financial crisis. Excessive pessimism set the market up for a favorable reaction to better-than-expected third-quarter earnings results. In our view, the stage is now set for a turn to the upside for 2020 corporate profits as the global economy begins the fourth mini-cycle rise of this record-long expansion.

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