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As we enter 2020, here are our answers to four key questions investors will have this year.
The consumer has been a resilient driver of the economic expansion – through trade tensions, slowing growth, sluggish business investment and geopolitical challenges. The key question for the new year is whether the economy’s strongest support shows any signs of fraying.
A key pillar of consumer strength – the labour market – is healthy. Though job gains could eventually level off, the unemployment rate is near historical lows and wages are growing above inflation. Additionally, interest rates are low, keeping the cost of credit affordable. That means the consumer can likely keep spending even as overall economic growth slows in 2020.
Still there are potential looming rain clouds in an otherwise sunny forecast. One is a new round of trade uncertainty between the U.S. and China that could prompt another escalation of tariffs directly on consumer goods and could pose further challenges to already weakened manufacturing sectors in Canada (and globally). Also, sluggish business sentiment and investment could negatively impact consumers more than last year.
While most developed central banks around the world lowered rates in 2019, the Bank of Canada (BoC) has kept short term-rates at 1.75% since October of 2018 (as of this writing). In contrast, the U.S. Federal Reserve (the Fed) shifted in 2019 from raising rates – as it did throughout 2018 – to lowering rates, with the view that adding monetary stimulus could provide insurance against elevated risk tied to trade uncertainty and slowing global growth. Inflation below the BoC’s and the Fed’s 2% target could show that the North American economic expansion was petering out and more stimulus was needed. However, a pickup in inflation past this target could suggest the opposite – that the central banks are likely to stay on hold or even raise rates again this year. While domestic central banks control short-term lending rates, long-term rates are much more affected by global macro conditions. With the rest of the world also slowing and global rates very low, even as rates fluctuate, they will likely stay within low ranges for some time to come.
Over the past two years global growth has slowed from 3.7% in 2017 to an estimated 3.0% last year.1 There are reasons to expect growth to stabilize and then improve in 2020:
On the flip side, China, the world’s second largest economy, is key to global growth but its growth has been decelerating over the past several years as it reforms its banking sector and restructures its economy from export-driven to consumer-led. China’s ability to successfully stimulate its economy as it has done in the past, despite headwinds from trade tensions and its burgeoning domestic debt, could be the X-factor for global growth to rebound this year.
The 2020 U.S. presidential elections will dominate headlines this year as new candidates and policies rise to the forefront and the looming impeachment process adds to political uncertainty. While it’s much too early to call winners or losers, there is a central tenet when it comes to investing – don’t play politics with your portfolio. As it turns out, stock prices have climbed on average under every configuration of U.S. government whether the Democrats or Republicans were in control of the White House and Congress, or during periods of divided government control. History shows that economic and corporate fundamentals matter more than politics.
That being said, market reactions to changes in leadership are hard to predict, even if we think they are likely to be short-lived with muted impact on portfolio returns. Policy changes to taxes, tariffs and regulation, for example, can affect market sentiment much in advance of the potential positive or negative effects such policies have on the overall economy. Importantly, new plans introduced on the campaign trail tend to change a great deal when (and if) they move through the democratic process.
Though 2020 starts the year with open questions for investors, investing over the long-term requires managing uncertainty, not removing it. We recommend preparing for normal swings in the market by staying diversified in high quality investments and maintaining the appropriate mix of equities and bonds for your comfort with risk to help keep your portfolio growing in 2020 and beyond.
1 IMF World Economic Outlook, October 2019
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