2020 Outlook: Sunny With a Chance of Rain

By Chris Puplava
Chief Investment Officer, Financial Sense® Wealth Management

February 18, 2020

You can find our first quarter 2020 client summary here.

Key Points:

  • U.S. and global monetary policy took a dramatic turn in 2019
  • Global economic growth likely bottomed in the fourth quarter of 2019
  • U.S. economic growth likely to slow further until the first or second quarter of 2020
  • Our highest conviction call for early 2020 is a weaker US dollar, with client accounts positioned accordingly
  • We have a bullish outlook for the first half of the year, and have increased equity exposure near maximum levels
  • U.S. political uncertainty will likely weigh on markets in the second half of 2020, which may lead us to move back to a neutral posture

Perhaps the biggest story for 2019 was the sudden reversal in U.S. monetary policy, which some believe to be the most dramatic U-turn by the Federal Reserve in its 100+ year history, as the Fed switched from raising rates and reducing their balance sheet (quantitative tightening) to cutting rates and rapidly expanding their balance sheet (quantitative easing) at the fastest pace since 2008.

We covered this momentous shift and its relationship to the “Repo Crisis” on our weekday podcast with Richard Duncan, a prior analyst at the World Bank and consultant for the International Monetary Fund (IMF) during the Asian Currency Crisis, who provided some very interesting food-for-thought on what this likely meant for interest rates, stock prices and the economy moving forward:

The Fed was not the only central bank that responded to weak economic growth and tightening financial conditions last year. In 2018, nine of the top 10 central banks were tightening. In 2019, most of them reversed course. Furthermore, central banks are estimated to increase their balance sheets by $1T dollars this year in 2020 (see slide 39, JP Morgan presentation here). China also followed suit by lowering reserve requirements on its banks and expanding fiscal stimulus to such an extent that their fiscal deficit is expected to be the largest in over a decade.

There is an old saying on Wall Street, “a rising tide lifts all boats,” which we believe aptly applies to today. Central banks are raising the global liquidity tide through their easing efforts, which has supported global stock markets over the last year. The more favorable monetary backdrop along with a break in the U.S.-China trade war have improved global sentiment and, we believe, led to a bottom in global growth as of last fall. We are seeing the greatest economic improvement in emerging markets followed by stabilization in Europe. As the U.S. was the last economy to enter an economic slump, we believe the U.S. economy is not likely to bottom until late Q1 to early Q2 of this year.

Given the above, our highest conviction call over the next six months is for a weaker US dollar (USD). When the dollar is weak we typically see commodities strengthen, foreign currencies rise relative to the USD and foreign and emerging market stocks outperform the U.S. For this reason, along with the attractive relative valuations in foreign markets, we have been steadily increasing client exposure to foreign markets and commodities by reducing our U.S. equity exposure and decreasing our fixed income exposure to free up capital for these areas.

Just as economic tops are a process, so too are bottoms and so for the next few months we may have a mixed picture economically abroad, but we do believe that stocks are likely to be higher by the end of the first half of the year. Therefore, client allocations toward equities are near their maximum levels with fixed income near the minimum. Beyond six months, the outlook turns more uncertain, particularly as we approach U.S. presidential elections, which could have a significant impact on the markets.

If the economic and market outlook begins to dim and political uncertainty increases, we may decrease risk in client accounts mid-year by taking profits in our stocks and moving back toward a neutral allocation relative to our benchmarks. We will also make adjustments as necessary should any unforeseen shocks arise, such as war in the Middle East, unravelling of a phase one trade deal with China, or financial market dislocations. If you have any questions regarding our outlook or investment decisions in your portfolio, please do not hesitate to reach out to your wealth manager. We wish all our clients a healthy and prosperous 2020.

Best,
Chris Puplava
Chief Investment Officer
chris[dot]puplava[at]financialsense[dot]com

888.486.3939 Toll Free, 858.487.3939 Tel, 858.487.3969 Fax
Post Office Box 503147 · San Diego, CA 92150-3147
10809 Thornmint Road 2nd Floor · San Diego, CA 92127
www.financialsense.com

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