Navigating Rate Cuts, Trade Wars and Elections

Bob Browne, executive vice president and chief investment officer for Northern Trust, introduced the firm’s 2020 market outlook during a roundtable discussion with members of the financial services media.

According to Browne, Northern Trust continues to be moderately overweight risk entering 2020, while the global economy stabilizes after an episode of mid-year weakness in 2019.

“We expect markets to focus on tensions between economic growth and political risks, such as the U.S.-China trade war, Brexit and the 2020 U.S. election,” Browne says.

Echoing its previous projections, Northern Trust anticipates the combination of moderate growth and technological innovation will continue to suppress inflation, which in turn will bolster the global central bank easing cycle that is already well underway.

“This leaves us continuing to favor ‘lower-risk risk assets,’ such as U.S. equities and high yield bonds,” Browne explains. He suggests that central bankers, unable to do anything about inflation, are increasingly willing to serve political agendas to support the global economy. As a result, we are entering 2020 on a new global easing cycle.

Equities and Real Assets

Browne observes that equity markets rebounded strongly in 2019, helped by the Federal Reserve’s policy reversal.

“The Fed cut rates three times, which helped distract investors form the U.S.-China trade dispute and slowing economic growth,” Brown says. “In 2020, we expect companies to return to earnings growth with more global demand from reduced trade tension and easy monetary policy.”

Under this regime, Northern Trust projects the highest returns to be in non-U.S. developed markets, particularly in Europe, though such returns will come with elevated risk. For its part, the U.S. is expected to deliver a solid return with less risk.

In 2019, Northern Trust’s research shows, global real estate and listed infrastructure assets performed well, driven by falling interest rates. Natural resources lagged on slower economic growth and stagnant oil prices.

“This year, we expect continued low interest rates and attractive income to support global real estate and listed infrastructure,” Brown says. “Like last year, we anticipate slow economic growth of approximately 2.5% GDP growth to weigh on natural resources.

Fixed Income and Interest Rates

On the fixed-income side, 2019 bond market returns were strong, benefitting from the combination of falling interest rates and tighter credit spreads. As Browne observes, it paid to take on duration and credit risk in 2019.

“Looking forward, we expect more moderate but positive bond returns, and continued low interest rates, which may fall even more,” Browne says. “Investment grade fixed income will provide a return premium over cash.”

Northern Trust’s analysis posits that the U.S. Federal Reserve is likely to cut rates twice in 2020, which will potentially restore steepness in the yield curve.

“We recommend taking on duration risk in portfolios where appropriate,” Browne says.

The Investor Perspective

Allianz Life Insurance Company of North America also published a 2020 market outlook this week, this one focused more on investors’ expectations rather than the fund manager outlook. The research suggests 43% of Americans are worried a recession is “right around the corner,” down from 50% in Q3 2019. At the same time, 39% of respondents say they are worried about a big market crash “on the horizon,” down from 48% in Q3 2019.

“Interestingly, despite this current sense of calm, the number of people who say now is a good time to invest in the market continues to decrease,” observes Kelly LaVigne, vice president of consumer insights, Allianz Life. “This may be because people are anticipating more volatility in 2020, and don’t want to take the risks that those major swings can have on their savings and retirement.”

According to the Allianz research, nearly one-third of respondents (31%) say putting some money into a financial product that provides a guaranteed stream of income in retirement is the most important step to take to help make sure they have a secure retirement. This is up from 26% last quarter, perhaps reflecting momentum from the passage of the Setting Every Community Up for Retirement Enhancement Act.

Risks from inflation are top of mind, the survey shows. Almost half (49%) of Americans say the rising cost of living is a big risk to their security in retirement, and over one-third (34%) say that inflation may prevent them from ever being able to retire.

“Those with the longest runway toward retirement, Millennials, are most worried about the impact of rising costs, both now and in their future,” the Allianz analysis finds. “They are more likely to say the rising cost of living is preventing them from saving money for retirement as much as they should (62%, compared with 56% of Gen Xers, and 42% of Baby Boomers).”

Millennials are also most worried about being able to pay for necessities like housing or medical care in retirement due to the rising cost of living (50%, compared with 46% of Gen Xers, and 35% of Boomers).

“The rising cost of living is a real threat to hard-earned retirement savings, particularly as people are spending more time in retirement,” LaVigne says. “But less than four in 10 (38%) say they are confident that their financial plan can deal with the rising cost of living. The good news is that a majority of people (60%) recognize having a financial product that offers the opportunity for increasing income can help reduce that risk. Boomers are even more likely to agree, at 63%.”