Economists in general expect 2020 will see another year of growth, even if not quite so robust as in 2019. As January comes to an end, CCM’s Chief Investment Officer, Andy Kaufman, shares his thoughts on what he believes will happen to the economy and markets in 2020:
This year will be an interesting year, and I see it as a year of two halves. One half driven by fundamentals and earnings and the other half will be focused on the election and its potential outcomes.
I think 2020 will see the U.S. economy continuing to grow at a 1.5% to 2% rate, inflation remaining tame, and the employment and housing sectors continuing to remain strong, especially with mortgage rates and corporate debt still funding at historical lows. Some may argue this historic expansion will start to crack this year, but I believe it will be difficult to stop the expansion. The Federal Reserve seems willing to do anything to sustain the economy’s growth and limit market volatility and has already started Quantitative Easing phase four (QE4). The average consumer and corporate balance sheets are also in decent shape, so the good times should continue. The exception could be sectors such as manufacturing and private investment since we have already seen some national data measures showing contraction. Areas we will be paying close attention to include consumer spending trends (used car prices, retail sales, etc.), wage inflation, and corporate earnings. Consumer spending statistics help provide a picture of the financial health of the economy and corporate profitability provides a summary measure of corporate financial health which ultimately could serve as an important indicator of economic performance.
The current economic cycle is now the longest on record, and despite the Federal Reserve’s accommodative policy and the positive impact it has had on risk assets, we continue to be somewhat cautious in our view of corporate credit. There remain uncertainties surrounding trade policy and the upcoming elections, but maybe more importantly, corporate spreads are near historical tights, leaving little compensation for added credit risk.
Looking at the 2020 election, if the outcome keeps the government divided, little will likely change for the economy. However, if a single party can get control, the economy could experience a greater impact. So far, the impeachment trial has had little influence on the economy and the fact that Trump has the lowest career average approval of any president in 75 years1 may not either. He’s in an economic tailwind and whether voters rely on this measure will be a major factor in his re-election and thus how the economy plays out.