Even with slowing economic growth, 2019 proved to be a banner year for both stocks and bonds. Favorable policy developments occurred that helped buffer the global manufacturing recession sparked by the trade war. Key takeaways from the prior year show the U.S. is firmly in the late-cycle economic phase. In the U.S., private investment growth is waning and productivity is falling. Meanwhile, global economic activity is bottoming but becoming less synchronized with the U.S. The positive is, there are incipient signs that the global trade and industrial recession is possibly ending. Global monetary policy (i.e. easy money) has boosted liquidity and there are signs the trade war may be easing.
In the U.S., central bank activity, led by the Fed, had a significant influence on the markets throughout 2019, including additional accommodating actions in the 4th quarter of 2019. The Fed lowered the fed funds rate by 1/4th of a 1% for the third time in October. Additionally, they announced they will purchase $60B T‑bills each month into quarter 2 of 2020 in order to provide liquidity to short-term markets.
The economic outlook for 2020 is largely similar to what occurred in 2019, with a continuation of modest economic growth and moderate inflation at or below the Fed’s 2% target level. With this outlook, a stable but accommodating Fed is likely to prevail once again this year. Having said that, we anticipate higher volatility than in years past. The global political climate, U.S. elections, Brexit, global trade negotiations, Iran, etc., suggests the financial markets will fluctuate throughout the year, buffeted by headline news that may or may not have any influence on actual economic output.
As always, a diversified portfolio that include both U.S. and foreign equities and bonds is the best strategy to protect your hard-earned wealth.