Investment Commentary – January 2020

January 28, 2020

Despite records gains in the stock market, including an increase of 29 percent for the S&P 500, economic growth slowed in 2019. While increased optimism surrounding trade negotiations, pre-emptive interest rate cuts from the Federal Reserve, and the lingering tailwinds from the 2018 tax cuts helped maintain economic growth, we anticipate further slowdown in the coming year. Leading economic indicators continue to point to weakness in manufacturing and business spending. We expect GDP to slow in 2020, and though we do not expect a technical recession in the next 12 months, the economy does face several factors that keep it in the recessionary window.

Though a renewed sense of optimism regarding trade negotiations between the U.S. and China buoyed market sentiment in the last few weeks of the year, underlying structural issues make it unlikely that trade tensions will remain subdued in the long-term. Continued geopolitical uncertainty may continue to be a drag on corporate confidence and global supply chains, putting more importance on consumer spending. Though unemployment remains at a historic low, this is a lagging economic indicator and tells us little about the direction of the economy. There are concerns that the weakness in American manufacturing and business investment could begin to drag down the services sector. Such a turn could result in higher unemployment and stagnating wages. Such a turn could hurt corporate earnings. Corporations are already vulnerable because of the high levels of corporate debt, and would suffer if rates increase. All of this makes the market more vulnerable and increases the likelihood of a bear market.

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