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DiMeo Schneider & Associates

Asset Allocation | Discretionary | Investment Manager Research

2020 Investment Outlook

January 9, 2020

Our 2020 outlook steps off the shoulders of 2019, a year in which several asset classes hit new all-time highs and valuations are approaching similarly full levels. Investors are looking to 2020 and asking if trade wars, or even war, will finally derail markets moving higher, will a contentious election prove impactful in the U.S. or does the Fed’s more accommodate reversal in 2019 mean we’re back to the races? In the following sections, we break down the primary drivers to asset prices, discuss our updated outlook for long-term returns and pull out key themes investors should consider in 2020.

Capital Market Factors

Economic Growth

While accommodative monetary policy, a “phase one” U.S.-China trade deal and transparency on Brexit provide some clarity heading into 2020, global business activity ended 2019 on a weak note. We will continue to monitor an ensemble of macroeconomic data, but acknowledge that a slower growth trajectory may limit prospects for incrementally higher financial asset valuations. Therefore, we favor a defensive portfolio stance with a greater focus on managing risk exposure than reaching for return targets.

Monetary policy

Investors will remember 2019 as the year Fed officials embraced the power of its balance sheet to achieve policy goals. After shrinking its balance sheet by more than $692 billion over two years through August 2019, the Fed added more than $405 billion in just the final four months of 2019 and forecast balance sheet expansion in 2020. In our view, increased global growth uncertainty heading in 2020 strengthens the case for incremental monetary policy accommodation in the form of lower rates and even more balance sheet expansion. Relative to Gross Domestic Product (GDP), the Fed has significantly more room to grow its balance sheet in 2020, which may support financial asset valuations and prolong the business cycle.

Fiscal

Monetary policy impotence and sluggish growth may be the catalysts for meaningful discourse on fiscal reforms and modern monetary theory (MMT) in the U.S., Euro Area and developed markets. However, meaningful progress will take time and is unlikely to boost household consumption in 2020.

Inflation

Through November, the Fed’s preferred year-over-year inflation measure, core personal consumption expenditure price index (“PCE”), remained stubbornly low at just 1.6 percent. Although long-term broad inflation expectations remain well-anchored, any upside inflation surprise should support equity valuations and inflation-sensitive bonds, such as Treasury Inflation-Protected Securities (TIPS).

Currency

The trade-weighted U.S. dollar ended 2019 near 20-year highs despite the Fed’s mid-year dovish pivot and asset purchase program reboot beginning in September 2019 dubbed “not-quantitative easing” (not-QE). Although Fed policy may not spur consumption growth, it may successfully weaken the U.S. dollar relative to foreign currencies and boost valuations for tangible assets and international equities.

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