The markets will build on 2019’s gains next year, after they withstood “trade tensions, impeachment, and geopolitical uncertainties” with the economy posting a record 11th year of expansion, according to economists.
“2019 has been a year for the record books,” writes Gary Schlossberg, Wells Fargo Investment Institute global strategist. “In our view, a low-inflation, low-interest-rate backdrop has supported ‘easy’ financial conditions this year and encouraged a rotation by many investors into stocks and other more highly charged assets.”
And those conditions set next year up as a continuation of the good times for investors. “We believe that a low-inflation, more interest-rate-sensitive growth cycle bodes well for a 12th year of growth in 2020, particularly now that geopolitical uncertainties have eased temporarily,” he writes.
While this “market-friendly investment backdrop” will help stocks and bonds continue rallying, Wells Fargo expects “greater economic and asset sensitivity to financial-environment changes.” The result will be “closer monitoring of economic and earnings growth, interest rates, overseas developments, and other performance drivers.”
When the Federal Reserve entered 2019, projections were for continued rate increases, but the central bank changed course “during the first half of the year, giving way to rapid-fire rate cuts between late July and late October” that gave the economy a push forward.
An inverted yield curve and economic weakness in the late summer and early autumn caused “short-lived recession worries,” that were erased by Fed rate cuts.
“Inflation has been ‘the dog that didn’t bark’ in this economic cycle — contributing to the enduring strength of household purchasing power and consumer spending,” Schlossberg said. “Price pressures have been contained by modest economic growth, dollar strength weighing on import prices, and by an array of structural forces ranging from lingering ‘globalization’ and relatively weak labor unions to online retailing and the growing use of less costly, private-label merchandise.”
Separately, WFII President Darrell Cronk expresses the hope that after two “very active” years the Federal Reserve “will likely play a much smaller role in policy actions in 2020.” While it may not be “a deep slumber,” the shift from interest rate cuts to balance sheet expansion will remain.
Scott Anderson, chief economist at Bank of the West Economics, agrees, “it appears growth and the expansion are on a sustainable path in 2020.”
The trade war between the U.S. and China didn’t escalate and policy uncertainty about Brexit has been resolved. Consumer spending will continue to fuel the economy, although at a “somewhat” slower pace next year, “given their favorable starting point of low mortgage rates, pristine household balance sheets, and a tight labor market,” he said.
But “a sharp stock market selloff or other financial instability, higher interest rates, labor market or income growth deterioration as the fiscal stimulus from the 2017 Tax Cuts and Jobs Act fades,” could be concerns, Anderson said.
Slow business investment has held back the economy as firms waited to see how the trade issues played out. “While not part of our baseline forecast,” he said, “the easing of geopolitical uncertainty and early signs of a bottom in the synchronized global slowdown could be enough for businesses to shift gears in 2020 back toward real investment.”
Jobless claims
Initial jobless claims fell to 222,000 on a seasonally adjusted basis in the week ended Dec. 21 from an upwardly revised 235,000 the week before, previously reported as 234,000, the Labor Department reported Thursday.
Economists expected 220,000 claims.
Continued claims slid to 1.719 million in the week ended Dec. 14 from 1.725 million the week before.
