Year-End Wrap Up and 2020 Outlook

2019: A Year of Recovery and Growth

The performance of the equity market in 2019 was nearly the opposite of 2018, largely driven by Federal Reserve policy. In 2018, investors feared a policy misstep as the Fed raised rates four times, with over half of global central banks following suit. This led to a steep market decline by the end of the year. In early 2019, the Fed quickly reversed course, signaling a shift with verbal adjustments and then executing three rate cuts in the second half of the year. Additionally, the Fed injected liquidity into the system to stabilize the repo market, which many commentators referred to as QE4, even if Chairman Powell didn’t. As a result, equity prices surged across the board, with all nine Russell style boxes gaining at least 20%—the most since 2013.

Economic Cycle Assessment: Early or Late?

Looking ahead to 2020, the critical question is where we are in the economic cycle. Early in an economic cycle, risk is generally more favorable, with cheap valuations, accommodative monetary policies, and ample growth capacity. Late in the cycle, it’s typically wise to protect capital, as higher interest rates and signs of overheating signal the end of the expansion.

At present, it’s difficult to categorize the cycle. Unemployment rates are at record lows in many developed nations, and while global PMIs have contracted, the economy doesn’t yet show signs of topping out. Inflation remains low, and central banks are more concerned with boosting inflation than curbing growth. This uncertainty makes it challenging to predict how much longer this expansion will last.

Risks to the Expansion

Despite the positive growth, several risks remain that could threaten this expansion, now the longest on record. The U.S.-China trade conflict continues, and companies may remain reluctant to invest, limiting the recovery in manufacturing and impacting hiring and earnings growth. Tight labor markets are pushing up wage costs, while pricing power remains elusive in most industries, putting pressure on margins.

If geopolitical tensions do not escalate, the economy may simply slow rather than stall. However, much depends on how these risks play out.

Central Banks’ Response: Ready to Act

One thing is clear: central banks are committed to sustaining the expansion. Should further stimulus be required, it will be delivered. Quantitative easing has become a “normal” tool, with central banks accepting larger balance sheets and even taking on greater risk in markets. Some believe that zero is not the lower bound for interest rates, with negative interest rates potentially becoming a reality. While it remains uncertain whether negative rates will boost private sector spending, low rates offer substantial benefits to governments, which could spur further fiscal stimulus and rising asset prices.

2020 Investment Strategy

It hasn’t paid to fight the Fed, and with interest rates likely remaining low in 2020, the environment remains favorable for risk assets. We will continue to stay invested according to each client’s risk profile, monitoring market signals and adjusting our approach if our factor model shifts to a “risk-off” mode.

This website commentary reflects the personal opinions and analyses of Gainplan LLC employees. It does not describe Gainplan LLC’s advisory services or client investment performance. Views in the commentary may change anytime without notice. Nothing here constitutes investment advice, performance data, or recommendations for specific securities, transactions, or strategies. Mentioning a security or its performance is not a buy or sell recommendation. Gainplan LLC uses various investment strategies, not all discussed here. Investing in securities carries risks, including loss. Past performance does not guarantee future results.

Gainplan LLC provides links to third-party websites for convenience. Clicking these links leaves our website. Gainplan LLC is not responsible for errors, omissions, or content on third-party sites and does not necessarily endorse their information. Users accessing these sites must follow their terms and assume all risks.