By Peter Shelp
January 14, 2020
2019 was a year of positive economic growth in the US that translated into substantial market gain in the Dow, Nasdaq and the S&P 500. The S&P 500 alone advanced over 28%. Certainly, these gains are considerable and well above the average returns of the major indices over an 80-year history. Of course, that was last year. What about 2020? Here are several considerations that may shed light on what could impact the economy and the markets this year:
1. Gross Domestic Product (GDP). GDP is the measure of growth of the US economy. Currently, the US economy is trending stronger than other developed economies. Growth of more than 2% is considered positive. Many estimates point to growth ranging from 2% to 3%. GDP growth of 3% or more would be very positive and would bolster corporate earnings per share. Earnings growth is a driver of market prices and dividends. Corporate balance sheets and earnings, as well as business confidence, are strong and expected to continue. Conversely, growth of 1% would be less positive and dampen economic and market performance for the year.
2. Unemployment rate. The current unemployment rate is approximately 3.7% which is considered a multi-decade low. Surprisingly, there are more job openings in the US than there are applicants. That should lead to an increase in wages as competition for jobs in a strong economy continues. Wage growth has been stubborn but has been rising as we enter 2020. Wages growing at more than 4% would be a positive. Consumer spending is approximately 70% of GDP. With the job market strong and wages rising, that should keep the American consumer spending. Watch the consumer confidence index as it measures optimism.
3. Interest Rates. The federal reserve has indicated that it plans to hold off on further interest cuts to the fed funds rate. Fed Chair Jerome Powell has indicated that the economy is stable and is likely to be on hold for 2020. Further, inflation has been tame and trending at about 3% for many years. Therefore, prices have not been rising at a rapid rate which would curtail consumer purchasing. However, the Fed is data dependent and will alter their stance depending on economic indicators. Rising interest rates typically dampen the economy and market values. What does that mean? Savers, dependent on interest for income will have another year of low returns. However, housing and other purchases that require financing should continue to be affordable and benefit the consumer.
4. Globalization. We exist in an interconnected world economy which exposes us to geo-political events particularly, and at the time of this writing, those in the Middle East. The price of oil typically moves up when tensions increase. Arguably, the US economy has always existed in, and has been exposed to, world turmoil. Trade deals with our trading partners are important. The use of tariffs as a bargaining strategy can cause volatility. The status of trade deals with our main partners and in particular, China, will evolve in 2020. Arguably, the trade tariff battle with China is hurting both major economies. A continuation of tariffs and a breakdown in the negotiations may be a negative to the markets.
The 2020 election in November can also be consequential. However, the market has always been exposed during election years. A balance between Congress and the White House would be a positive to the markets. Nonetheless, election concerns affect investors behavior and can lead to volatility. Further, it is surprising that the US deficit does not get much attention but is at exceedingly high levels and will have to be addressed by our elected officials.
Last year, investors and their retirement plans were rewarded. Will this continue in 2020? Tune in at this time next year.