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2019 was an impressive year for many asset price returns, but looking forward we are expecting a more mediocre environment when it comes to asset price gains.
The Fed’s abrupt shift in policy during 2019 provoked investors’ risk appetite and led to outsized gains for equities in the face of slowing global growth and the ongoing trade war between the U.S. and China. Last year, the S&P 500 Index gained the most since 2013 with a nearly 29% return, while the Nasdaq 100 Index was up the most since 2009 with a return of almost 38%. All in all, 2019 was an impressive year for asset price returns, but looking forward we expect a more benign environment with asset prices yielding to a smaller range.
December marked an important milestone in the process of trade resolution between the U.S. and China as phase one of a trade deal was agreed on.
Within the deal, tariffs on the first tranche of $250 billion would eventually be dropped from 30% to 25%. Tariffs on the second tranche of $120 billion would go down from 15% to 7.5%. Lastly, the third tranche of $150 billion that was going to have 15% tariffs imposed on December 15 was suspended. While it appears that both sides could take away small wins from the first phase of the deal, the bigger impact should come from added stability and certainty over the long-run. Ultimately, investors were likely looking for a larger rollback of the tariffs in place, but the important takeaway here is that both sides were willing to de-escalate. The resulting compromise helped propel equity prices to new all-time highs in December, and immediate recession fears have been tabled for the time being.
Consumption continues to propel the U.S. economy near trend pace and the outlook for next year isn’t much different as consumers continue to be employed and well-equipped to spend.
Personal spending grew at an annualized pace of 3.2% in the third quarter according to the latest release on third-quarter GDP. Personal consumption was slightly below the 4.6% annualized increase in the second quarter, but nonetheless, still a strong increase for the quarter. Against the headwinds of an aging population and subdued business investment in the late innings of the business cycle, we still expect the economy to grow close to its potential at 2.0%. Therefore, our outlook for 2020 real GDP is expected to be within the range of 1.60% to 2.10%.
The Fed has completed their “mid-cycle adjustment” and has signaled that they will remain on the sidelines in 2020 with regards to changes in policy rates.
The Fed concluded the year by leaving policy rates unchanged in December and crystalized the view that a high-hurdle is in place for the next change in policy rates. Prior to the meeting, commentary from Fed officials set the tone as Powell previously stated, “monetary policy is in a good place” and most officials agree that the current stance of monetary policy is “appropriate.” With the high hurdle for a change in monetary policy in place, we think the Fed is likely to sit on their hands for the foreseeable future barring a material change in the economic outlook. For instance, the latest Summary of Economic Projections showed the Fed’s forecast for policy rates as unchanged for 2020. Despite the market pricing in one cut, we view the “mid-cycle adjustment” has concluded and we don’t expect any changes to policy rates through 2020.
Generally speaking, we are cautiously optimistic with the state of the economy going forward as recent Fed easing, de-escalating trade tensions, and a well-equipped consumer are likely to extend the current expansion.Get the full January 2020 Market Update here
The views expressed above reflect the views of Allianz Investment Management LLC, as of 01/2020. These views may change as market or other conditions change. This report is not intended and should not be used to provide financial advice and does not address or account for an individual's circumstances. Past performance does not guarantee future results and no forecast should be considered a guarantee either. Allianz Investment Management LLC is a registered investment advisor that is a wholly owned subsidiary of Allianz Life Insurance Company of North America. Allianz Life Insurance Company of New York is also a wholly owned subsidiary of Allianz Life Insurance Company of North America.