Larry Adam: Fed Will See Their Efforts Bear Fruit

by Larry Adam, CIO, Raymond James

Key Takeaways

• Fed Will ‘See Results’ from 2019’s Insurance Rate Cuts
• ‘Countdown’ to US Presidential Election Begins
• Earnings Growth Brought Back Into ‘Focus’

Happy New Year! Following the overindulgence of the holiday season, the new year provides us with the opportunity for a fresh start as we set our resolutions for the months to come. While some of same themes seem to reoccur each year (i.e., living a more active, healthy lifestyle), the act of setting specific, achievable intentions requires us to be creative, aware, and mindful. Ironically, this is exactly the same approach our team of economists, strategists, and portfolio managers sought to take as we crafted our forecasts for the new year. Our most important goal has, and will continue to be, providing clear, concise views on the US economy and various asset classes so that investors can be successful in 2020 and all the years that follow.

• US Economy Will Continue to Break New Ground | At 127 months, the current economic expansion is the longest on record. But the more things change, the more they stay the same, and the state of the economy is still of the utmost importance when evaluating the return potential of the major asset classes. We forecast that US GDP growth will be moderate at 1.7%, but that a resilient labor market and robust consumer spending will uphold the expansion at least through the presidential election. Although it is rare for recessions to begin in an election year, multiple dynamics will cause us to sharpen our pencils when assessing our economic outlook post-election. Our real-time indicators suggest a small probability of recession over the next twelve months, so closely monitoring them will be crucial should the economy’s ground-breaking run start to halt.
• Fed Will See Their Efforts Bear Fruit | In 2019, the Federal Reserve (Fed) took action in the form of three ‘insurance’ rate cuts to support US economic outlook when trade tensions and slowing global economic growth started to spark concern. Those actions recalibrated Fed policy, with Chair Powell since signaling that rates would be on hold unless incoming data or global developments revived recessionary fears. The results of the Fed’s patient, thoughtful decisions last year will likely be seen in 2020, as the effects of monetary policy tend to lag. Given that the Fed now has limited ammunition with the fed funds target rate at 1.50-1.75%, we do not anticipate interest rates being altered this year.
• New Year, New President? | As we begin to fill out our 2020 calendars, November 3 is a date every investor will be sure to note. Congressional gridlock (Republican Senate, Democratic House) is the likely outcome, but elevated uncertainty is at the top of the ticket. Since no Democratic candidate has maintained a clear, consistent lead in the polls, the determination of the nominee may last well into the summer and may lead to a brokered convention – the first for the Democratic Party since 1952. Positive economic data has historically led to a favorable outcome for the incumbent, but given the level of division across the country, the election may ultimately be determined by two key swings states: Pennsylvania and Wisconsin.
• Bond Market Unlikely to Turn Over a New Leaf | Global yields and spreads will likely remain lower for longer, which will reduce the upside return for the bond market overall. More moderate US growth, muted inflation, strong international demand, and favorable demographics lead us to believe that the 10-year Treasury yield will not move significantly over the next twelve months (year-end target: 1.75%). We expect credit market spreads will widen slightly, but will not negate the positive performance of our favored fixed income sectors: investment-grade and emerging market bonds.
• Renewed Focus on Earnings Growth | As 2019 US equity performance was driven largely by P/E expansion, 2020 should renew the emphasis on earnings growth, which we forecast at ~5-6%. The macroeconomic backdrop, easing financial conditions, low interest rates, and positive seasonality trends related to the presidential cycle combined with this reacceleration in earnings growth helped us formulate our base case that the S&P 500 will rally to ~3,350 by year-end.
• Some Resolutions Are Hard to Stick to | In addition to health and happiness, we hope that investors are successful in reaching all of their goals for the new year. But one resolution that may be more difficult than others is less time in front of screens, as the highly anticipated rollout of 5G will make our mobile devices faster and more capable than ever before! The transition to 5G is the largest enhancement in wireless technology in a decade, and the increased demand for speed, storage, software and applications will directly benefit one of our favorite sectors, information technology, in the new year.

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All expressions of opinion reflect the judgment of Raymond James & Associates, Inc., and are subject to change. Information has been obtained from sources considered reliable, but we do not guarantee that the material presented is accurate or that it provides a complete description of the securities, markets or developments mentioned. There is no assurance any of the trends mentioned will continue or that any of the forecasts mentioned will occur. Economic and market conditions are subject to change. Investing involves risk including the possible loss of capital. International investing involves additional risks such as currency fluctuations, differing financial accounting standards, and possible political and economic instability. These risks are greater in emerging markets. Companies engaged in business related to a specific sector are subject to fierce competition and their products and services may be subject to rapid obsolescence. Past performance may not be indicative of future results.

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