During the first half of 2019, many analysts and commentators were expressing fears of imminent recession. Those fears have largely subsided, thanks to both the Federal Reserve’s decision to reverse its policy of monetary tightening and the Trump administration’s gradual progress toward a lasting trade agreement with China.
With the monetary spigots back on and trade negotiations thoroughly underway, markets have rebounded and expectations for 2020 have improved. According to the latest U.S. market outlook published by Invesco Ltd. IVZ, investors can expect fairly robust economic performance.
However, while Invesco is clearly quite optimistic about the U.S. market in 2020, its outlook is not without dark spots. The long-running trade war between the U.S. and China represents the biggest risk facing the American market as it heads into 2020.
Economic outlook is broadly positive
According to Invesco, the U.S. economy in 2020 should continue to perform along much the same lines as it has over the past couple years:
“For the U.S., we expect an environment of modest growth of approximately 2% in 2020, which exceeds consensus expectations. Our view is that growth bottoms early in the year at approximately 1%, and then accelerates as the year progresses. We expect inflation to remain relatively benign, at about 2.2%.”
With economic growth slated to accelerate in the second half of 2020 after a slow start, Invesco sees the broad outlook for the U.S. to remain quite stable:
“The bottom line is that the big U.S. macro narrative has not changed. It is still an environment of relatively weak growth and benign inflation.”
While growth in 2019 has remained far from robust, it has not been terribly anemic either. Proactive monetary policy has played a part in keeping things running smoothly, even as trade tensions have flared up repeatedly.
High hopes for trade war breakthrough
Invesco’s U.S. economic and market outlook is more bullish than the Wall Street consensus thanks to its greater confidence in a trade breakthrough. The company foresees significant improvement, if not a definitive resolution, on the trade war front over the course of next year, as negotiations grind on toward the U.S. presidential election:
“We expect the U.S.-China trade wars to continue in the short term, although there is an increasing likelihood of incremental improvements as we get closer to the presidential election in November 2020. That election could increase economic policy uncertainty in the early part of 2020, but it should decline toward the end of the year.”
As the presidential election looms, policy uncertainty is likely to become increasingly elevated, Invesco warned, but the bank anticipates that ongoing negotiations between the Trump administration and the government of Xi Jinping will yield meaningful progress over the course of 2020.
Trade war could weigh on business confidence
Despite its considerable confidence in the prospect of a trade negotiation breakthrough in 2020, Invesco was not wholly positive. As with any high-stake, complex geopolitical diplomatic process, the U.S.-China trade negotiations could be derailed by a wide range of variables, as indeed has already occurred a number of times over the past several months. If the expected breakthrough does not to materialize, it could weigh heavily on business confidence:
“The longer the uncertainty of the trade war persists, the more it is likely to weigh on business sentiment and erode business investment. The manufacturing component of the economy will likely suffer, although we expect the consumer to remain relatively strong given low unemployment. However, we will closely monitor employment and the health of the consumer.”
A prolonged trade conflict is a recipe for economic trouble, as companies are liable to hold back on capital investment until long-term policy clarity is established. The U.S. manufacturing industry, already struggling under tariff pressures, could see its capital base further eroded. Such an outcome would certainly not be conducive to supporting long-term economic growth and could end up putting downward pressure on domestic capital markets.
Verdict
The U.S. economy has been holding up quite well despite pressures from tariffs and other retaliatory trade actions sparked by the U.S.-China trade war. If some breakthroughs on this front are achieved ahead of the Nov. 3 presidential election, as Invesco anticipates, markets should experience fresh levels of confidence. If a deal does not materialize, however, confidence could begin to ebb much as it did in late 2018 and into early 2019.
Investors should move with caution. U.S. economic and capital market health will depend on meaningful progress on trade. Despite Invesco’s confidence, this is far from guaranteed.
Disclosure: No positions.
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