2020 Economic Outlook

January 21, 2020

A year ago, investors were licking their wounds following a sharp stock-market correction. Today, they’re confronted with a notably different market backdrop

Jim Solloway, Chief Market Strategist and Senior Portfolio Manager in SEI’s Portfolio Strategies Group, shares our expectations for the global economy and financial markets in 2020.

Our outlook

Transcript


Hello, I’m Jim Solloway, Chief Market Strategist and Senior Portfolio Manager in SEI’s Portfolio Strategies Group. Today I will be sharing our expectations for the global economy and financial markets in 2020.

A year ago, investors were licking their wounds following a sharp stock-market correction. Today, they’re confronted with a notably different market backdrop. Share prices generally ended 2019 near their highs for the year.

Looking ahead, we expect the U.S. and global economies to continue growing, but at a sluggish pace. This should keep inflation under control and encourage central banks to remain accommodative. Quantitative easing also should help keep fixed-income yields relatively steady even as government deficit spending picks up. Altogether, this scenario should be positive for risk assets.

Drilling down a bit further, we think the U.S. is converging with the rest of the world as U.S. economic and profits growth decline. Given the disparity in stock-market valuations, international markets can be expected to outperform U.S. equities.

Growth rates are calculated in local-currency terms, except emerging markets, which are calculated in U.S. dollars.

We also think the U.S. dollar will reverse convincingly to the downside, which would represent another tailwind for non-U.S. economies and financial markets.

The Federal Reserve’s pivot toward an aggressive approach to supporting the overnight lending market has the potential to significantly increase the global supply of dollars at a time when the foreign exchange value of the greenback remains rather elevated. We consider U.S. currency depreciation a high-conviction call since the dollar appears overvalued on a fundamental basis.

Looking overseas, we expect China’s economy to stabilize and improve. The U.S./China trade-war truce and a steady progression of fiscal and monetary stimulus measures over the past two years should pay off in 2020. Early signs of improvement can already be seen, which should boost the economic prospects of trade-dependent economies. Our wish for the New Year: No presidential tweets about tariffs.

Data is amplitude-adjusted, which means that the LEI is expressed relative to the country’s underlying growth trend. A value of 100 signifies that the economy is expected to grow at its trend rate in the period ahead. Values above 100 and below 100 indicate better-than-trend growth and worse-than-trend growth, respectively.

As always, there are a few wildcards that could cause markets to behave in ways that run counter to our positioning in 2020.

We foresee less Brexit uncertainty, assuming a trade deal between the UK and the EU can be reached. We expect rationality to prevail, but a no-deal Brexit remains a residual risk that could give way to renewed volatility as the year-end 2020 transition deadline nears.

Presidential politics could roil equity markets in the U.S. and elsewhere. A sense of which Democratic nominee will face Donald Trump in the coming U.S. Presidential election should get clearer in March, when 25 states and Puerto Rico go to the polls.

The impact of Fed policy is also a potential wildcard. While we don’t see it as a likely outcome, the Fed’s continued economic stimulus efforts at a time of full employment could cause a melt-up in stock prices.

The current forward-earnings multiple on the S&P 500 Index sits at about 18.  Even with the economic support provided by low interest rates, we would view it as a danger sign if the multiple rise above 20. Another stellar year for U.S. equities in 2020 would be a source of concern rather than celebration.

Thank you and happy new year!

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Glossary of Financial Terms:
Forward earnings multiple is equal to the stock price divided by earnings per share. It is expressed in years. For example, an earnings multiple of 10 means that it would take 10 years of earnings to equal the stock price.

Index Descriptions:
The MSCI Canada Index tracks the performance of the large- and mid-cap segments of the Canada market. 

The MSCI Emerging Markets Index is a free float-adjusted market-capitalization-weighted index designed to measure the performance of global emerging-market equities. 

The MSCI EMU Index is a free float-adjusted market-capitalization-weighted index designed to measure the performance of mid- and large cap companies in 10 developed markets in the European Union.

The MSCI Japan Index is designed to measure the performance of the large- and mid-cap stocks in Japan. 

The MSCI United Kingdom Index is designed to measure the performance of the large- and mid-cap segments of the U.K. market. The Index covers approximately 85% of the free float-adjusted market capitalization in the U.K.

The MSCI USA Index is designed to measure the performance of the large- and mid-cap segments of the U.S. market. The Index covers approximately 85% of the free float-adjusted market capitalization in the U.S.

The S&P 500 Index is a capitalization-weighted index made up of 500 widely held U.S. large-cap companies.

Legal Note

Disclosure:
This material represents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. This information should not be relied upon by the reader as research or investment advice. This information is for educational purposes only.

There are risks involved with investing, including loss of principal. International investments may involve risk of capital loss from unfavorable fluctuation in currency values, from differences in generally accepted accounting principles or from economic or political instability in other nations. Emerging markets involve heightened risks related to the same factors as well as increased volatility and lower trading volume. Bonds and bond funds will decrease in value as interest rates rise.

Index returns are for illustrative purposes only and do not represent actual investment performance. Index returns do not reflect any management fees, transaction costs or expenses. Indexes are unmanaged and one cannot invest directly in an index. Past performance does not guarantee future results.
Information provided by SEI Investments Management Corporation, a wholly owned subsidiary of SEI Investments Company.