Ashfield Capital Market Update

January 10, 2020 | Why You Need to Look Beyond the Headlines

As we enter a contentious presidential election year with tensions mounting in the Middle East, it is becoming ever important to shift attention away from headline risk and towards fundamental drivers. Doing so should give investors a balanced, more constructive view of the current investment environment.

The natural starting point is to ask the question: will the US economy grow in 2020? Research shows that consumer net worth (CNW) is a strong leading indicator for the US economy, which makes sense—the US consumer accounts for nearly 70% of total US GDP. When consumer net worth accelerates, as seen in the chart below, higher growth rates have historically followed. Based on this indicator, Evercore ISI Research pegs US GDP growth in 2020 at +2.5%, marking an acceleration from 2019.

The healthy consumer is arguably tied to a persistently strong labor market. In the last 50 years, recessions were triggered when weekly initial jobless claims spiked (chart below) and new hiring deteriorated. Today, neither of those recessionary conditions are present. Job growth continues each month, and firings continue to decline.

By many measures, the US economy remains on firm footing. Nevertheless, the Federal Reserve has indicated a willingness to remain accommodative. In the last four months, the Fed has expanded its balance sheet by over $600 billion, which we would argue was a major contributor to the stock market rally in Q4 2019. In 2020, it seems more likely that the Fed will cut interest rates versus raising them.

Central banks across the world also remain accommodative. As noted by Evercore ISI Research:

  • Prime Minister Boris Johnson is likely to push fiscal stimulus in Britain
  • Japan’s cabinet approved $120 billion stimulus
  • The European budget implies a 40 basis point fiscal impulse in 2020
  • South Korea to implement aggressive fiscal policy in 2020
  • Hong Kong unveiled $500 million stimulus package

Not listed here is China, whose central bank (PBOC) surprised markets in the new year by announcing a 0.5% cut to commercial bank reserve ratios, releasing $115 billion of liquidity into the financial system. The PBOC’s move was signal-sending: as the trade war enters a make-or-break phase, China is showing global markets its commitment to goosing economic growth should the impasse continue.

Finally, a note about the impeachment proceedings. Given there have only been two presidential impeachments in US history—Andrew Johnson and Bill Clinton—market history is limited. A look at the Clinton impeachment timeline, however, shows that the market continued to rise compellingly even as political infighting gripped the country.

Conclusion

As uncertainty persists in the US political and geopolitical spheres, short-term market volatility is likely to crop up in the equity markets. Taking an objective view of the US economy should provide a counterbalance to the negative, worrisome headlines that will likely characterize the entire year. US GDP growth is expected to hit at least 2% in 2020; corporate earnings growth is set to recover from low baseline comparisons in 2019i; and the Federal Reserve and central banks around the world are committed to accommodative monetary policy.

The news cycle is very noisy and short term – as long-term investors we find it more important than ever to tune out the noise and focus on the data. As we have noted above, the data continues to be constructive as we head into 2020.

 

 

This Capital Market Update “Market Update” is designed to highlight various market and economic information and is not intended to interpret laws or regulations. This Market Update has been prepared solely for informational purposes, based upon information generally available to the public from sources believed to be reliable, but no representation or warranty representation, express or implied, has been made as to the accuracy or completeness of the information contained herein and is not an offer to buy or sell or a solicitation of an offer to buy or sell any security or to participate in any trading strategy. If any offer of securities is made, it will be pursuant to a confidential offering memorandum, an investment management agreement or other offering materials, which contains material information not contained herein and which supersedes this information in its entirety. This Market Update is not designed to be a comprehensive analysis of any topic discussed herein, and should not be relied upon as the only source of information. Additionally, this Market Update is not intended to represent advice or a recommendation of any kind, as it does not consider the specific investment objectives, financial situation, applicable risk factors, and/or particular needs of any individual client or investor and should not be relied upon as the basis for investment decisions. Additional information is available upon request.

The investments discussed herein are for illustrative purposes only and it should not be assumed that such investments were or will be profitable or that the investments or recommendations Ashfield Capital Partners makes in the future will be profitable or will equal the anticipated results discussed herein. Past performance is not necessarily indicative of future results. The indices, markets and countries referenced in this Market Update are provided for informational purposes only and should not be used as the basis for making an investment decision. The indices, markets and countries referenced in this Market Update are included merely to show the general trend in the markets in the periods indicated and are not intended to imply that the underlying returns were comparable to the indices, markets or countries either in composition or element of risk. There are significant differences between client accounts and the indices, markets and countries herein including, but not limited to, risk profile, liquidity, volatility, and asset composition.

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The benchmarks referenced are included to reflect the general trend of the markets during the periods indicated and are not intended to imply that the underlying returns were comparable to the market indices either in composition or element of risk. There are significant differences between client accounts and the indices herein including, but not limited to, risk profile, liquidity, volatility, and asset composition.

The S&P 500 Index is a capitalization-weighted index comprised of 500 stocks chosen for market size, liquidity and broad industry group representation within the U.S. economy.