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All data as of January 6, 2020, unless otherwise noted.

Executive summary

The U.S. economy enters 2020 coasting on the longest expansion on record. The consumer has been the main positive driver of growth, but business sentiment has weakened notably. We expect growth to moderate closer to the long-run trend pace of 1.7%. This gradual slowdown could re-ignite growth concerns, revive policy uncertainty and make it harder for financial markets to gain traction.

Record-long economic expansion set to continue

Thank household consumption for the record economic expansion. Through 11 years of growth, the longest uninterrupted stretch on record, the household has offset isolated weakness in the energy sector (in 2015–2016) and sluggish business investment and trade-related uncertainty (2018–2019). Indeed, over the past five years, consumption has grown faster than the overall economy in all but three quarters.

Given the importance of household spending for our overall economy, this sector rightly deserves close attention, and the good news is that the outlook is positive. The labor market has bolstered consumer confidence, but the household balance sheet deserves credit, too. Households have increased savings during this expansion and lowered leverage levels. This not only supports current consumption, but provides an important buffer against future headwinds or an uptick in uncertainty.

The labor market roared into 2020 in its best shape in 50 years and is one of the most important supports to consumption and the economy. So far, the benefits of a strong labor market have come without the usual harmful side effects of wage-driven inflation, although real wage gains are starting to materialize. This wage dynamic bears close watching, however, and could test the Fed’s willingness to let the labor market run “hot” should labor costs intensify.

Business investment slowed notably in the second half of 2019 as business sentiment soured. There’s widespread optimism the phase one trade deal between the U.S. and China will help lift the gloom, but we are more cautious. Against a backdrop of slowing growth and important trade issues still lingering with Europe, and a weakening earnings picture, business spending may continue to reflect caution in the coming year.

Too soon to say goodbye to policy uncertainty

In 2019, we wrote about the corrosive impact of policy uncertainty, which materialized forcefully with a global decline in manufacturing activity and sentiment that caused central banks to swing into easing mode. This coming year, we think policy could continue to play an important role in the economy and financial markets.

The 2020 elections have so far been largely ignored by markets. But by the end of the first quarter, the Democratic primaries will have taken place in 29 states and could narrow the field significantly. As the policy debate crystallizes, the ideological differences between the two candidates could draw more attention. Under this topic, we consider the policy areas where the Executive Branch has outsized impact, which could garner market attention.

Trade-related uncertainty had an outsized impact on global growth in 2019, delivering the weakest year for world GDP since 2009. This was met with widespread central bank easing, driving policy rates lower. With global interest rates at or near historic lows, there is a growing concern that policy reaction will pack less potency. Indeed, policies that were initiated during the financial crisis, including asset purchases and negative interest rates, are still in place and were resorted to again when growth was merely experiencing a weak patch.

2019 will be tough to repeat

Few expected the outsized returns of 2019, which started as simply a recovery from the sizable sell-off in Q4 of the prior year. By mid-2019, central bank rate cuts caused interest rates to plunge, delivering outsized price gains for fixed income investors and buoying equity market returns. To top it off, the Fed rebuilt its balance sheet to quell the squall in repo markets. While not an explicit QE policy, it nevertheless injected additional liquidity into markets.

Can this party continue? In fixed income, investors may wake up in 2020 with the realization that income gains have now been reduced significantly. In the final four months of 2019, as interest rates were range-bound, the Barclays Agg declined 0.35% – a painful illustration of paltry returns available to traditional fixed income investors when yields stay flat.




Equity markets enter 2020 with valuations close to 20-year highs. Yet S&P 500 companies are projected to see a second consecutive quarter of negative year-over-year earnings growth in Q4, driven by margin compression and stagnant growth. Looking ahead, equity market returns tend to track with EPS growth, which has decelerated notably. Markets may experience more difficulty finding traction as investors zero in on underlying fundamentals.


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