Five years ago, it would have been surprising that the hotspots for global political risk might one day include Hong Kong (one of the wealthiest places in Asia and a world financial center), Chile (the wealthiest and most stable economy in South America), the U.K. (home of one of the oldest parliaments) and the U.S. (the world’s largest economy and arguably its oldest democracy).
That’s where we are as we head toward 2020, however, which is why these themes are headlined in Solving for 2020, our annual look into the coming year. Investors may be coming off the sidelines, as we suggested they might in our recent Perspectives. But as confidence in the economic data grows, wariness about political uncertainty and “fiscal dysfunction” is as elevated as it has been in years.
Trump Speech or Stump Speech?
The past two weeks have seen core government bonds sell off and yield curves steepen back to levels last seen in the summer. Investor surveys and flows data indicate that investors are rotating back into equities, but also into more economically sensitive cyclical and value stocks, rather than defensive and growth stocks. Third-quarter earnings were better than expected.
One of my Global Equity Research colleagues got to hear President Trump speak at the Economic Club of New York last week, and he said it “felt like he was testing stump speech lines for the upcoming reelection campaign.”
Who could blame him? As he pointed out, U.S. real GDP growth was the highest among the G7 in 2018; unemployment is historically low, with African-, Mexican- and Asian-American unemployment at record lows and female unemployment at a near 70-year low; consumer income is up; and the S&P 500 has settled around its all-time highs.
Any other president would be sitting on today’s market and economic data anticipating a landslide reelection next November. This one is facing tight opinion polls and an impeachment hearing entering the full glare of the public eye.
But just as Brexit isn’t just another intra-EU wrangle and the unrest in Hong Kong isn’t just another political demonstration, Trump isn’t just another U.S. president. They all speak to far-reaching uncertainty and volatility in the global political and economic landscape.
That creates unpredictability for years to come but also day-to-day: Trump’s trade negotiators make positive noises and the next day the president insists that, “if we don’t make a deal, we’re going to substantially raise those tariffs.”
The U.S. election will bring all of this into focus.
Next November, the differences in the opposing candidates’ platforms are likely to be far wider than they have been in most campaigns of the past 50 years. The current field of Democratic contenders is testing out unusually interventionist policies that could have a profound impact on the energy, financial, technology and health care sectors that make up more than half of the S&P 500. And that, in turn, has inspired more centrist candidates, such as former New York City Mayor Michael Bloomberg and former Massachusetts Governor Deval Patrick, to consider entering the race.
A Bumpy Ride
What are investors to make of it all?
We do believe that the recent turn in economic data and investor sentiment is real. We do think there is opportunity in cyclical, value-oriented and small-cap stocks that have underperformed for so long. But we would caution against assuming that this is the start of a sustained trend for greater risk appetite.
Even if growth picks up, the cycle is “long in the tooth” and central banks have fewer tools at their disposal to prop things up. Most of all, the political landscape is dotted with pitfalls that could destabilize even a full-throttle economy.
For those reasons, we envision 2020 drawdowns to be lengthier and deeper than the brief dips of 2019. That would likely create value opportunities for those with a long-term view—but it could make for a bumpy ride.
In Case You Missed It
- U.S. Consumer Price Index: +0.4% in October month-over-month and +1.8% year-over-year (core CPI increased 0.2% month-over-month and 2.3% year-over-year)
- Japan 3Q 2019 GDP (Preliminary): +0.2% annualized rate
- Euro Zone 3Q 2019 GDP (Second Preliminary): +1.1% annualized rate
- U.S. Producer Price Index: +0.4% in October month-over-month and +1.1% year-over-year
- U.S. Retail Sales: +0.3% in October
What to Watch For
- Monday, November 18:
- NAHB Housing Market Index
- Tuesday, November 19:
- U.S. Housing Starts and Building Permits
- Wednesday, November 20:
- FOMC Minutes
- Thursday, November 21:
- U.S. Existing Home Sales
- Japan Purchasing Managers’ Index
- Friday, November 22:
- Euro Zone Purchasing Managers’ Index
- U.S. Purchasing Managers’ Index
Statistics on the Current State of the Market – as of November 15, 2019
|S&P 500 Index||0.9%||2.9%||26.7%|
|Russell 1000 Index||1.0%||2.9%||26.7%|
|Russell 1000 Growth Index||1.6%||3.1%||30.7%|
|Russell 1000 Value Index||0.4%||2.8%||22.8%|
|Russell 2000 Index||-0.1%||2.3%||19.8%|
|MSCI World Index||0.7%||2.3%||24.0%|
|MSCI EAFE Index||0.1%||1.2%||18.8%|
|MSCI Emerging Markets Index||-1.5%||0.7%||11.5%|
|STOXX Europe 600||0.5%||1.5%||19.6%|
|FTSE 100 Index||-0.6%||1.0%||13.3%|
|CSI 300 Index||-2.4%||-0.2%||31.7%|
|Fixed Income & Currency|
|Citigroup 2-Year Treasury Index||0.1%||-0.1%||3.2%|
|Citigroup 10-Year Treasury Index||0.9%||-1.3%||9.4%|
|Bloomberg Barclays Municipal Bond Index||0.3%||-0.3%||6.6%|
|Bloomberg Barclays US Aggregate Bond Index||0.5%||-0.5%||8.3%|
|Bloomberg Barclays Global Aggregate Index||0.5%||-0.9%||6.1%|
|S&P/LSTA U.S. Leveraged Loan 100 Index||0.2%||0.5%||8.5%|
|ICE BofAML U.S. High Yield Index||-0.1%||0.1%||11.9%|
|ICE BofAML Global High Yield Index||0.0%||0.0%||11.1%|
|JP Morgan EMBI Global Diversified Index||0.1%||-0.4%||12.9%|
|JP Morgan GBI-EM Global Diversified Index||-1.2%||-1.7%||9.1%|
|U.S. Dollar per British Pounds||0.9%||-0.3%||1.3%|
|U.S. Dollar per Euro||0.3%||-0.9%||-3.3%|
|U.S. Dollar per Japanese Yen||0.4%||-0.6%||0.9%|
|Real & Alternative Assets|
|Alerian MLP Index||-2.9%||-4.7%||-0.7%|
|FTSE EPRA/NAREIT North America Index||1.4%||-1.9%||25.1%|
|FTSE EPRA/NAREIT Global Index||0.2%||-1.8%||20.5%|
|Bloomberg Commodity Index||-1.0%||-0.1%||5.1%|
|Gold (NYM $/ozt) Continuous Future||0.4%||-3.1%||14.6%|
|Crude Oil (NYM $/bbl) Continuous Future||0.8%||6.5%||27.1%|
Source: FactSet, Neuberger Berman.