At this time last year, the best news for financial market performance was an extremely low bar of expectations. Markets in 2020 will have a much higher hurdle to clear following 2019’s so-called “everything rally.” Despite the recent rise in asset prices, equity and credit market valuations look reasonable in light of recent Federal Reserve (Fed) accommodation and return of the “lower for longer” interest rate environment.
We expect risk asset pricing will continue to be supported by the favorable mix of “Goldilocks” economic growth, stable inflation and a pause in Fed policy changes until the presidential election. Following two straight years in which Fed policy was arguably the most significant driver of market performance, the Federal Open Market Committee under Chair Jerome Powell’s leadership will likely move to the sidelines and take a more conservative approach to policy moves.
Despite our expectation that stable monetary policy will result in greater market stability this year, tail risks remain as the record-long U.S. economic expansion moves deeper into “extra innings.” The outcome of the presidential election likely tops the list of risk factors; however, market volatility could also arise from setbacks in U.S.-China trade negotiations, a disruptive exit from negative interest rate policies and rising geopolitical tensions across the globe.
Exhibit 1. 2018 and 2019 Actual; 2020 and 2021 Forecasts
Source: Bloomberg
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Index Definitions:
S&P 500 Index – An index of 500 stocks chosen for market size, liquidity and industry grouping, among other factors. The S&P 500 is designed to be a leading indicator of U.S. equities and is meant to reflect the risk/return characteristics of the large-cap universe.
Russell 2000 Index – An index measuring the performance of approximately 2,000 small-cap companies in the Russell 3000 Index, which is comprised of 3,000 of the largest U.S. stocks.
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Disclosures:
The views expressed in this material are the views of PMAM through the year ending December 31, 2019, and are subject to change based on market and other conditions. This material contains certain views that may be deemed forward-looking statements. The inclusion of projections or forecasts should not be regarded as an indication that PMAM considers the forecasts to be reliable predictors of future events. Any forecasts contained in this material are based on various estimates and assumptions, and there can be no assurance that such estimates or assumptions will prove accurate. Actual results may differ significantly.
Past performance is not indicative of future results. The views expressed do not constitute investment advice and should not be construed as a recommendation to purchase or sell securities. All information has been obtained from sources believed to be reliable, but accuracy is not guaranteed. There is no representation or warranty as to the accuracy of the information and PMAM shall have no liability for decisions based upon such information.
