Economic Update

Our 2020 Outlook

Published: January 31, 2020Updated: January 21, 2021

By: Stash Graham

As we prepare for an eventful year ahead, we thought it would be good to put together a few data points and themes that we are watching this year. Please feel free to reach out with any thoughts on any of these topics.

  • The aggregate debts levels in the United States and around the world are historically high. As such, we believe the economy will not be able to absorb higher interest rates. At the end of 2018, the 10-year US Treasury was at 3.3% and financial markets were breaking down. We believe the “breaking point” interest rate is even lower now as more debt has been piled on over the last year. We believe interest rates will end the year lower than where they started 2019. The 10-year United States Treasury started the 2020 year yielding 1.91%. We believe that the 10-year US Treasury will push all-time lows (1.32% in 2016) at some point this year. We continue to believe the Federal Reserve will continue to provide support to financial asset prices. An extension of their repo liquidity and (not-Quantitative Easing) operations into the late spring/early summer is likely. In addition, it is possible that we receive another interest rate cut or two this year after being told just 2 months ago that interest rate cuts were not happening. We continue to favor fixed income as a better value (risk/reward) than common equity.
  • We believe Gold will continue to benefit from a few tailwinds. Lower interest rates, Federal Reserve debt monetization, growing US Government Deficit ($1.1T) and Debt ($22T), geopolitical uncertainty, etc all provide a floor for gold prices. If the stock market were to correct, Gold has the optionality to provide some protection from systematic risk. A stronger dollar could hamper a move higher but the price of the Gold has performed well versus the US Dollar. If you think a debasement of currency happens in the future, gold benefits greatly. Considering the amount of US Government debt outstanding, we think a debasement is likely.
  • The risk of economic growth continuing to slow in 2020 as it did during 2019 is real. We could see an uptick in activity in Q2 as China is expected to buy a lot of goods via the Phase One agreement. The Coronavirus is now adding concern into an already leery stock market that these purchases will take place in the fashion needed to support growth. If you are looking for evidence of the market’s skepticism look at soybean futures at the time of the Phase One agreement, they did not move higher. We do not expect a quick fix for this virus and believe it will continue to hamper China this quarter. The virus has already shown an effect on American multinational company stock prices (see Starbucks, McDonalds, American Airlines, etc).
  • A host of C-suite surveys have been completed by PWC, Deloitte, Duke University and Business Roundtable over the last 120 days. Why do we care about these surveys? Because the people who make the decisions about jobs and fixed investment participate in the surveys. The one consistent theme among all four of the surveys: A focus to maintaining profit margins. This is an indirect way of saying cost-cutting. What is the biggest expense a business generally has? Labor. It seems the business labor (right sizing)’ has already started. The year-over-year Continuing Jobless claims (people who have already filed for initial unemployment benefits but continue to receive those benefits) growth rate is at economic cycle highs. Layoffs are not just one industry or State, the breadth of the continuing jobless claims is rising. If the consumer, who has seen meager wage growth, is expected to carry the economy on their shoulders in 2020. Do we want them worrying about job security? A few data points in the 4th quarter showed that the consumer might be succumbing to the weight. Slowing income growth assisted in a decline in consumer spending during one of the most important times of the year for retail companies. Consumer discretionary is a sector that we are looking to stay away from.
  • Now it isn’t complete doom and gloom. There are certain sectors and situations in the equity markets that present intriguing opportunities. Depending on your risk tolerance, you might have noticed a few common equity initiations in companies who have interesting attributes. For example, can you name a company that produced positive common equity returns in both the 2001-02 Dotcom Bubble and the 2008-09 Great Recession? The list is very small, and we have been focusing on one company whose stock price is not at their 52-week highs (and actually makes a cash profit). History is no guarantee of future performance, but we can learn ideas from the past. If you have any questions about the new equity positions, please feel free to reach out.
  • It would not be a proper annual outlook if we did not mention the 2020 Presidential Election. There are a wide range of possibilities all with different pressures on financial asset prices and the economy. We continue to think of a CFO of a Fortune 500 company and what could be going through their minds right now. We mentioned how business investment has been weak for the last 10 months and are showing no signs of turning. Can you blame a CFO for not wanting to invest? Imagine a debate over a $1 billion project say like a medical mask factory or a pipeline transporting natural gas. Who would want to risk their business and their careers by moving forward with this investment? There are many variables to be weighed. At the top of those concerns, are the 2017 tax cuts being repealed and what is my new tax expense? Due to the lack of skilled workers in a tight labor market, how much are my labor unit costs going to rise?

The information provided is for educational and informational purposes only and does not constitute investment advice and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell a security. It does not take into account any investor’s particular investment objectives, strategies, tax status or investment horizon.

All information has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy, reliability or completeness of, nor liability for, decisions based on such information and it should not be relied on as such.

Graham Capital Wealth Management, LLC (“Graham”) is a registered investment advisor. Advisory services are only offered to clients or prospective clients where Graham and its representatives are properly licensed or exempt from licensure.