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NEW YEAR: ECONOMIC CYCLE

“We expect the US economy to grow by 1-2% in 2020. But we will keep a close eye on business confidence which has weakened”

“We expect the US economy to grow by 1-2% in 2020. But we will keep a close eye on business confidence which has weakened”

  • US consumer confidence and demand remain strong

martes 07 de enero de 2020, 09:07h
As we enter 2020, the prospects for the US economy and stockmarket remain as uncertain as ever. In part, this is because we think that this year’s strong performance from the stockmarket – despite political and economic worries and tensions over trade – distorts the real picture somewhat. The run-up to the presidential election adds a further layer of uncertainty. So what can we expect in 2020?
Up, William Warren, Fund manager, Artemis Funds (Lux) – US Extended Alpha and Artemis Funds (Lux) – US Absolute Return Fund. Down, Cormac Weldon, Fund manager, Artemis Funds (Lux) – US Select and Artemis Funds (Lux) – US Smaller Companies.
Up, William Warren, Fund manager, Artemis Funds (Lux) – US Extended Alpha and Artemis Funds (Lux) – US Absolute Return Fund. Down, Cormac Weldon, Fund manager, Artemis Funds (Lux) – US Select and Artemis Funds (Lux) – US Smaller Companies.

The economic cycle has been extended

For some time, we have been saying that economic growth has peaked but the cycle has been extended. We still expect growth of 1-2% this year. But we will be keeping a close eye on business confidence which has weakened last year. This has resulted in less capital investment, but not lower employment at this point.

If we saw a further weakening in business confidence, we would become more concerned. Issues we would look out for include an escalation of the trade war and the prospect of a left-leaning Democrat being elected.

Assuming there is no further intensification of the trade wars, we do not envisage the US entering a recession this year. While we still await details of a final deal with China, the key aspect is that there is no further increase in tariffs and the possibility of rolling back some of those already in place.

Can the consumer come to the rescue?

It’s worth remembering that the US economy is 70% dependent on the consumer. And here the picture is still positive. Employment prospects remain very good, wages are growing and people generally have low levels of debt. As a result, consumer confidence and demand are high and this is helping to offset lower capital expenditure.

US consumer confidence remains strong

Chart title: US Consumer Confidence index versus unemployment rate since 2005

Source: Bloomberg as at 30 November 2019

The presidential election and the market

Looking ahead to this year it is clear that politics will play an important role in markets. While investors have got used to the Republican brand of populism embodied by Donald Trump, they are increasingly considering the possibility of a more left-wing version embodied by Democrat candidates Bernie Sanders or Elizabeth Warren. At this point, the more moderate Joe Biden is still leading the Democratic race. If he wins the nomination, polls currently suggest that he would defeat Donald Trump in November 2020. If that were to happen, the market would need to digest the end of Trump's deregulation and market-friendly policies and consider whether it outweighs the ending of his trade wars.

On balance, we think a Trump victory would be positive for stockmarkets and a Biden victory neutral. But the race for the nomination is far from over. If Warren were to be nominated, we think her current policies make her unelectable. So that news would have a negligible impact on markets. However, it's still early days and many things can change before the nomination is confirmed next summer. We will know more in early March, after the so-called super Tuesday of Democratic primaries.

Interest rates likely to be on hold

After a very active two-year period, we do not expect much activity from the Federal Reserve in 2020. The Fed has reversed its tightening policy with three cuts to interest rates. They have also started to articulate a change in policy which would mean they would not automatically increase interest rates if inflation were to meet their 2% target. This is quite a dovish policy and is supportive of markets. Of course, if we were to experience a recession the Fed would be more proactive, but that is not our expectation. At the same time, central banks around the world are providing stimulus and an interesting debate is emerging in Europe over the requirement for greater fiscal stimulus. We think this debate is likely to surface in the US as well.

Corporate earnings expected to grow

For the first time since 2016, corporate earnings growth turned negative during the third quarter of 2019. While some of this was due to the trade tensions, a comparison effect is also at work: 2018’s corporate earnings were boosted by tax cuts, making them harder to beat. Companies are also indicating cost pressures from the Chinese tariffs and in some areas are having to raise wages to retain and attract staff. Despite this, we expect corporate earnings to start growing again from this point. We are anticipating earnings growth of around 5% in 2020.

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