2020 Economic & Market Outlook › ... · The global growth expansion continues. Yes Volatility is back in the picture. Mostly The dollar’s bull run may be finally ending. Partly

Confidential & ProprietaryConfidential & Proprietary

2020 Economic & Market Outlook

January 23, 2020

Presented by

Benjamin A. Pace, III

Chief Investment Officer


Review of 2019

2

Source: IMF, Factset

Weaker growth, stronger returns

23.97%

-9.41%

26.60%

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

30%

2017 2018 2019

Global Stock Returns

MSCI ACWI

3.81%3.61%

3.01%

0%

1%

1%

2%

2%

3%

3%

4%

4%

5%

2017 2018 2019 (forecast)

Global GDP Growth

Real World GDP Growth


Asset Class Review

3

Source: Factset

2019: A rally for all asset classes

1.9% 1.6%0.0%

-2.3%-4.6%

2.6%

-4.4%

-10.0%

-13.8% -14.6%

-11.2%

-4.6%

-1.3%-2.4%

2.3%

5.6%

8.7%

14.4% 14.4%

7.6%

31.5%

27.8%

22.0%

18.4%

7.7%

25.8%

8.4%6.6%

-20%

-10%

0%

10%

20%

30%

40%

Cash Tax Exempt InvestmentCredit

High Yield EmergingMarket Debt

Global Bonds U.S. LargeCap

U.S. Small &Mid Cap

InternationalEquities

EmergingMarketEquities

Commodities REITs TIPs Hedge Fund(Fund ofFunds)

2018 2019


Scorecard for 2019 Themes

4

Theme Were We Right?

The global growth expansion continues. Yes

Volatility is back in the picture. Mostly

The dollar’s bull run may be finally ending. Partly

Cash is competitive again. And bonds are not just for income. Mostly

Favor credit over duration in fixed income. Yes

Equities are likely to rebound and offer compelling value. Yes

Favor emerging markets over developed markets. No

Limited upside for commodities in 2019. Yes

Alternative investments have a big role in portfolios. Partly

Diversification remains a critical tool for controlling risk. Yes


Key Themes for 2020

5

1. No recession in 2020

2. U.S. equities positioned for continued appreciation

3. Stabilization in global fundamentals

4. Cautious on fixed income after strong gains in 2019

5. U.S. dollar stays range bound


Theme 1: No Recession in 2020An acceleration in capital spending likely offsets slower, but still comfortably positive consumption and allows economic growth to hit 2.0% for the year.

6

Source: Factset

40

45

50

55

60

65

Dec-09 Dec-10 Dec-11 Dec-12 Dec-13 Dec-14 Dec-15 Dec-16 Dec-17 Dec-18 Dec-19

Contraction in Manufacturing, Not Services

United States - ISM (NAPM) Manufacturing, Purchasing Managers Index United States - ISM (NAPM) Non-Manufacturing Index

Mid-Cycle Slowdown

Mid-Cycle Slowdown


Tech Capital Expenditures Drive Growth in 2020Look for tech, research and development (R&D), and the buildout of the cloud to drive capital spending as opposed to more PCs and servers.

7

Source: Factset

0%

5%

10%

15%

20%

25%

30%

35%

Software + R&D as a % of Total Investment (nominal)


Accommodative Fed Policy

“Mid-cycle adjustment” likely over given 2% GDP growth forecast.

8

Source: FRED

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%

Dec-79 Dec-83 Dec-87 Dec-91 Dec-95 Dec-99 Dec-03 Dec-07 Dec-11 Dec-15 Dec-19

Fed Policy & Recessions

Recession Fed Funds Rate 10-Year Treasury Yield

Mid-Cycle Easing

Mid-Cycle Easing

Mid-Cycle Easing


Housing Market Rebound

Looser monetary policy already flowing through to the housing market.

9

Source: Factset

0

200

400

600

800

1,000

1,200

1,400

Dec-63 Dec-67 Dec-71 Dec-75 Dec-79 Dec-83 Dec-87 Dec-91 Dec-95 Dec-99 Dec-03 Dec-07 Dec-11 Dec-15 Dec-19

The Recovery in the Housing Market

Recession New Residential Sales, New Houses Sold (thousands) Six Month Average


The U.S. Consumer Remains Resilient Despite a few signs of slowdown in U.S. consumption in Q3, most data points to continued growth in 2020.

10

Source: Factset

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

4.5%

5.0%

Nov-95 Nov-98 Nov-01 Nov-04 Nov-07 Nov-10 Nov-13 Nov-16 Nov-19

Wage Growth

Average Hourly Earnings of Production and Nonsupervisory Employees (Year over Year)


Theme 2: U.S. Equities Positioned for Continued AppreciationMid-single digit revenue and earnings per share (EPS) growth are expected. There is potential for

further multiple expansion with interest rates and inflation remaining low.

11

Source: Factset

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

0x

2x

4x

6x

8x

10x

12x

14x

16x

18x

20x

Jan-04 Jan-06 Jan-08 Jan-10 Jan-12 Jan-14 Jan-16 Jan-18 Jan-20

Forward P/E Ratio

S&P 500 PE (next 12 months), left hand side Inflation Expectations, right hand side

A combination of declining inflation expectations, stable growth, and low rates have

allowed the market multiple to expand.

Inflation Expectations


Domestic-Oriented Firms Experience Robust Sales GrowthDomestic revenue has remained strong even as international sales have declined and earnings growth has decelerated.

Confidential & Proprietary

12

Source: Factset

5.10%

3.10%

-2.10%

0.70%

-2.20%

-7.40%

-10%

-8%

-6%

-4%

-2%

0%

2%

4%

6%

S&P 500 Companies with greater than 50% of revenuesin the U.S.

All S&P 500 companies S&P 500 Companies with less than 50% of revenues inthe U.S.

Q3 S&P 500 Revenue & Earnings Growth

Revenue Growth Earnings Growth


Theme 3: Stabilization in Global MarketsWhile valuations look cheaper outside the U.S., pressure from a slowdown in the trade and manufacturing sectors will likely prevent a significant closure in the valuation gap.

13

Source: Factset

5x

7x

9x

11x

13x

15x

17x

19x

21x

Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Dec-13 Dec-14 Dec-15 Dec-16 Dec-17 Dec-18 Dec-19

P/E Ratios (Next 12 Months)

MSCI Emerging Markets (EEM) MSCI EAFE (EFA) S&P 500 (IVV)


China, A Controlled SlowdownChina’s economy continues to decline from its high growth rates of the last decade. The trade wars are hindering the government’s efforts to control the magnitude of the slowdown. Poor demographics will add to the complexity of the situation.

14

Source: JPM Guide to the Markets, Capital Economics

0%

2%

4%

6%

8%

10%

12%

14%

16%

Dec-05 Dec-07 Dec-09 Dec-11 Dec-13 Dec-15 Dec-17 Dec-19

Chinese Real GDP Growth


Germany, The Key to the Eurozone

Too soon to say whether Germany’s manufacturing data has reached its bottom.

15

Source: Factset

-10

-5

0

5

10

15

20

25

30

35

40

Dec-09 Dec-11 Dec-13 Dec-15 Dec-17 Dec-19

German Manufacturing Business Survey Data

Germany - IFO Business Survey, Manufacturing, Business Climate


Theme 4: Cautious on Fixed IncomeWith both duration and credit risk working so well in 2019, investors would be wise to heed risk heading into 2020.

16

Source: Factset

300

350

400

450

500

550

600

Dec-18 Mar-19 Jun-19 Sep-19 Dec-19

High-Yield Spreads

ICE BofA U.S. High Yield Option Adj Spread

1.0%

1.2%

1.4%

1.6%

1.8%

2.0%

2.2%

2.4%

2.6%

2.8%

3.0%

Dec-18 Mar-19 Jun-19 Sep-19 Dec-19

Government Yield

U.S. 10 Year Treasury Yield


Be Cautious on the Long-End of the CurveWith longer-term rates dropping well over 1% in 2019, investors who took on more duration risk have been rewarded with equity like returns. However, they subject their portfolios to a potentially steep price decline if the rate environment reverses.

17

Source: Factset

-1.5%

-5.1%

-18.6%

-3.9%

-5.9%

-8.0%

-3.0%

Short-Term Treasuries Intermediate Treasuries Long-Term Treasuries Municipals U.S. AggregateU.S. Investment Grade

Corporates U.S. High Yield

Estimated price change from a 1% rise in rates


High Yield, A Market Neither Too Cheap nor Too Expensive

Corporate defaults rates remain low, but so do spreads.

18

Source: Factset

0

500

1000

1500

2000

2500

Jan-04 Jan-06 Jan-08 Jan-10 Jan-12 Jan-14 Jan-16 Jan-18 Jan-20

U.S. High-Yield Credit Spreads

ICE BofAML US High Yield - Spread - Option Adj Spread Average


Theme 5: U.S. Dollar Enters A Trading Range

Dollar should stop appreciating, but likely won’t fall much.

19

Source: FRED

80

90

100

110

120

130

140

Dec-95 Dec-97 Dec-99 Dec-01 Dec-03 Dec-05 Dec-07 Dec-09 Dec-11 Dec-13 Dec-15 Dec-17 Dec-19

Trade Weighted U.S. Dollar Index: Broad, Goods, Index


U.S. Dollar Enters a Trading Range

Relative interest rates and economic growth still in dollar’s favor.

20

Source: Factset

1.54%

0.60%

-0.63%

-0.13%

1.79%

0.74%

-0.28%

-0.02%

-1%

-1%

0%

1%

1%

2%

2%

U.S. U.K. Germany Japan

Government Yields

1Y 10Y


Important NotesCerity Partners LLC (“Cerity Partners”) is an SEC-registered investment adviser with offices in California, Colorado, Illinois, Michigan, New York, Ohio and Texas. The foregoing is limited to general information about Cerity Partners’ services, which may not be suitable for everyone. You should not construe the information contained herein as personalized investment or legal advice. Outcomes of any case studies described herein do not guarantee results of future services we may provide. There is no guarantee that the views and opinions expressed in this brochure will come to pass. Before making any decision or taking any action that may affect your finances or your company’s finances, you should consult a qualified professional adviser. The information presented is subject to change without notice and is deemed reliable but is not guaranteed. For information pertaining to the registration status of Cerity Partners, please contact us or refer to the Investment Adviser Public Disclosure website (www.adviserinfo.sec.gov). For additional information about Cerity Partners, including fees and services, send for our disclosure statement as set forth on Form ADV Part 2 using the contact information herein. Please read the disclosure statement carefully before you invest or send money.

©2020 Cerity Partners LLC, an SEC-registered investment adviser. All Rights Reserved. (01/20)

21

Documents

2020 Economic & Market Outlook › ... · The global growth expansion continues. Yes Volatility is back in the picture. Mostly The dollar’s bull run may be finally ending. Partly