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Market Outlook | Q1 2020

Economy

In its quarterly global economic update, the International Monetary Fund (IMF) trimmed its outlook for global growth in 2020 from 3.4 percent to 3.3 percent since its last forecast in October 2019. Weakness within the Indian economy was the largest detractor to the outlook. During the past 3 months, the IMF pointed to recent data which suggested global trade and manufacturing appears to have bottomed out which was accompanied by actions of global central banks to ease monetary policy during the second half of 2019 via policy rate cuts and balance sheet expansion. The IMF calls for US growth to slow from 2.3 percent in 2019 to 2 percent this year. The mid-year rate cuts, which typically carry a lagging effect, are expected to spur growth in the first half of 2020. Risks to the IMF’s forecast include increased trade frictions, rising geopolitical tension and failure of the improvement expected for the Russian and Brazilian economies to materialize.

The minutes from the Federal Reserve’s FOMC members showed all members agreed to leave the Federal Funds rate unchanged at a range of 1.50-1.75 percent. The committee noted positive developments in US-China trade relations, falling likelihood of a no-deal Brexit, and improving residential investment. The Federal Reserve’s current estimate is for rates to remain unchanged in 2020. Market view however call for an additional 25-50 basis points in rate cuts during 2020. In its 2020 outlook, economists from Vanguard anticipate up to 2 additional rate cuts this year on the back of rising uncertainty for US policy-makers, business decisions on capex, and sentiment driven consumer spending.

Equity Markets

US equities closed the final quarter of 2019 strongly, posting a gain of 9.1 percent (measured by the S&P 500) in the final three months of the year. The fourth quarter’s rise ended the year +31.5 percent (S&P 500), its best year since 2013. Returns for developed markets (+28.4 percent) outpaced emerging markets (+18.9 percent) for the second straight year. Through the third quarter, world equities (+18 percent) trailed the 20-Year Treasury which returned 20 percent. Relative performance moved in favor of equities as world stocks returned 9 percent while treasuries fell slightly. A few factors mentioned for this turn included improved outlook for global manufacturing activity, increased service sector activity, and lastly steady job gains.

The consensus long-term outlook across the largest asset managers including BlackRock, Vanguard and JP Morgan call for lower US equity returns over the next 10-15 years with annualized nominal returns for the period in a range of 3.5 percent to 6.1 percent. The expected returns for US equities (in contrast to the past decade) comes from an assumed decline in global growth, current US equity valuation levels, and an increased probability of volatility spikes as the global economy slows. Higher returns assumptions for non-US equities range from 6.5 percent to 10 percent across these same firms support the case for global equity diversification.

Fixed Income Markets

The Federal Reserve (Fed) made its first rate cut in a decade during 2019, reversing the tightening policies of 2015-18. As trade tensions escalated throughout the year, the Fed continued the cutting cycle, with the final rate cut taking place during the October meeting. The Fed concluded their last meeting of the year in December by signaling a make-no-moves posture following 2019’s three cuts, leaving the federal funds target rate at 1.50 percent to 1.75 percent. The Central Bank’s accommodating policy successfully staved off recession and sustained the expansion through the fourth quarter however Fed officials are now on hold. Globally, 40 central banks cut rates in 2019, ending the year with a total of 63 rate cuts. Expectations for further monetary easing dialed down in the fourth quarter of the year as global central banks signaled a limit to the number of unconventional tools they are willing to deploy.

As the expansion continues into the new year, investors are starting 2020 with less compensation to pursue credit risk. Risk assets ended the year strong with credit spreads rallying to near decade-low levels for many fixed income sectors. Investment grade spreads tightened 53 basis points, ending the year at 90 bps (0.90 percent). Putting these figures in perspective, investment grade spreads have been wider than current levels 98 percent of the time over the previous ten years. Similarly, option-adjusted spreads (OAS) for the U.S. High Yield sector have been higher 95 percent of the time over the previous ten years. The positive, risk-on tone supporting credit and high yield bonds led to rising Treasury yields in the fourth quarter. The 10-Year U.S. Treasury yield closed the year at 1.92 percent, rising 26 basis points for the quarter but falling 77 basis points for the calendar year. The basis points yield spread between the 2-year and 10-year Treasury curve (2s/10s curve) steepened to close out the year after briefly inverting in August. The 2s/10s curve ended the quarter at 34 basis points, the steepest level seen since late 2018.

Alternatives / Real Assets

Broad based commodities (measured by the Bloomberg Commodities Index) rose 7.7 percent in 2019. During the final 3 months of the year, the index added 4.4 percent. Energy, which makes up nearly one-third of the index, moved 31.2 percent higher on the year despite a lower average price in 2019 relative to 2018 ($57/barrel vs. $64/barrel). The US Energy Information Administration (EIA) forecasts prices to average $59.50/barrel in 2020. US production grew by 12 percent last year and is expected to growth another 9 percent in 2020. The increased expected in US fuel exports projects the US to be a net exporter of oil in 2020.

Global REITs ended 2019 with returns of 24.4 percent (measured by FTSE NAREIT Global Real Estate Investment Trusts index). A research piece from Invesco further examined growth forecasts across developed economies in 2020. The research found growth rates for the US, the UK and many European countries are expected to fall back to each country’s relative trend rate. Additionally, developed Asian countries, Germany and Australia are expected to see accelerating growth back to trend (currently below trend). France and Spain are expected to see above trend growth in 2020. While global growth nominally should slow, the 2020 outlook for real estate demand remains positive. Invesco reflects its 10-year expected annualized return for Global REITs at 5.4 percent.

 

Securities offered through Rehmann Financial Network, LLC, member FINRA/SIPC. Investment advisory services offered through Rehmann Financial, a Registered Investment Advisor.

Published in Wealth Management

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