January 31, 2020 Letter to Clients

Benjamin Franklin is commonly credited with the invention of the bifocals, which he created to assist with his near- and far-sightedness. As we turn the calendar to the new year, and new decade for that matter, we may not have the luxury of simply wearing bifocals to put all that impacts the markets and economy into a clearer picture. Instead, we rely on our experience, sound fundamentals and investment discipline to provide focus and to guide us through the next decade.

“20/20 Vision”

With the U.S. experiencing the longest period of economic expansion ever recorded, you’ll likely hear analysts and economists talking about their “20/20 Vision” for this year and beyond hoping to continue the run. With that said, geopolitical events such as the recent outbreak of the coronavirus, trade tug-of-war, the ongoing impeachment trial, and the U.S. presidential election are weighing on investors’ minds, and it is feasible that we will continue the trend of being “comfortable with the uncomfortable.”

Many economists believe that bull runs do not simply die from old age but rather collapse from excesses that build up as a cycle matures. While we are certainly in a late stage of the cycle, low unemployment, benign inflation and an accommodative Federal Reserve (Fed) could continue the U.S. economic expansion far longer than investors anticipate. Last year, monetary accommodation by the Fed proved to be a tailwind for the U.S. economy and is likely to continue to support growth this year. The Fed is unlikely to announce interest rate changes ahead of this year’s election as to not look favorable to one side politically and is more concerned with promoting economic growth than preventing inflation.

Continued consumer confidence coupled with a strong stock market should provide support for ongoing consumer spending, which is expected to drive the slowing but growing U.S. economy against the backdrop of a strong labor market with solid wage growth and unemployment holding steadily under 4%. The housing market, which has been constrained by affordability problems in the past, is also expected to be positive this year with relatively low interest rates and flattening home prices bringing more buyers to the table despite low inventory.

Although consumer fundamentals are healthy, manufacturing has been under pressure as of late. The manufacturing sector, which makes up 11% of the U.S. economy, has been weakened by the lengthy trade war between Washington and Beijing, but is likely to see a rebound this year as tensions have calmed between the two countries with the signing of a “phase one” trade deal. One possible disruptor to this progress and global GDP growth could be the impact of the coronavirus outbreak on Chinese consumer spending, during a time in which the country has already been experiencing its worst economic slowdown in nearly three decades. Many companies with significant exposure in China, such as Starbucks, McDonald’s and Disney, have already suspended operations or restricted employee travel in response to the situation. The travel industry has also already felt the impact, with S&P 500 companies such as Delta Air Lines and Marriott, feeling the strain to their share prices following travel advisories from the U.S. Department of State. The continued spread of the coronavirus appears to be hitting global markets much like the severe acute respiratory syndrome (SARS) outbreak in 2003, but if the current outbreak follows the history of past health scares the market pullback won’t last long and this may be a temporary stumble.

“Phase One”

The U.S.-China trade war was a driving force in market volatility in 2019, but with the signing of a “phase one” trade deal at the beginning of this month, the markets breathed a short sigh of relief. As part of the deal, China has agreed to purchase an additional $200 billion of U.S. goods over the next two years and in exchange the U.S. has agreed to reduce tariffs on $120 billion in Chinese products from 15% to 7.5%. Still, it is undetermined as to how China will reach these numbers without diverting trade away from other countries and the deal does not address structural problems in the bilateral trade relationship. The markets have already priced in a certain amount of uncertainty around this issue; however, a resumption in the trade war will cause increased volatility in the markets as investment spending and business confidence will likely stall.

The Stock Market (Mostly) Doesn’t Care About Impeachment

Political dysfunction has always been a risk to the markets, and the impeachment proceedings are no different. But the markets have had a lot of time to digest the news and any reaction to the impeachment is likely going to be more of a function of what the economy is doing rather than the outcome of the impeachment itself. Certainly, as citizens we should care about the events unfolding in Washington, but as investors we cannot be derailed by the impeachment process. While many presidents have faced impeachment inquiries (most notably Richard Nixon), there have only been three U.S. presidents formally impeached by Congress (Andrew Johnson, Bill Clinton and Donald Trump). Although to date, no U.S. president has been removed from office through impeachment, history has shown us that from an investment standpoint, markets pay little attention to the details of the impeachment and have instead reacted to the broader economic backdrop. For example, strong economic fundamentals lifted the market during the Clinton impeachment whereas high inflation, spiking oil prices and an already struggling economy caused stocks to plummet when Nixon resigned. It is likely investors and Wall Street will largely shrug off Trump’s impeachment proceedings this year as they have instead focused on positive developments impacting the economy such as trade progress with China. Our takeaway is that although presidents will make their presence felt on the economy, as far as impeachment concerns go, history shows they don’t usually move the stock market.

Let’s Address the Elephant (or Donkey) in the Room

As we move closer to the election, I expect the relationship between politics and the stock market to be endlessly dissected by both the media and presidential candidates alike. Historically, the markets have provided strong returns regardless of the party or candidate that wins the election as the strength of the economy matters more to investors than the politics themselves and policies implemented by the government have a more direct impact on business, economic and stock market cycles than the outcome of the election. But this doesn’t mean the market will enjoy smooth sailing this year, as increased uncertainty around proposed policy changes has already had an impact on certain sectors within the market. As an example, several candidates have proposed changes to U.S. healthcare, which may have caused the sector to struggle for much of 2019. Other sectors may feel the same strain this year as the election draws nearer and we gain clarity on additional policy changes.  Keep in mind that often the policies promised on the campaign trail are grossly overstated leading up to the election and ultimately become a diluted reality following the president-elect’s inauguration.

Keeping Perspective

The market has certainly experienced several milestones in the last 10 years including new all-time highs and the record-breaking economic expansion. This unprecedented run, even despite the occasional drags of normal volatility creeping in from time to time, leaves both Wall Street and investors to speculate if 2020 is to be the year the bull’s run comes to an end.  I expect 2020 to deliver solid, yet more modest, gains than 2019 supported by lessened trade war tensions, an accommodative Fed and a healthy U.S. economy. Uncertainties still exist, however, as there’s a lot of noise in the financial markets and in the media, which will only get louder as we progress through the year. It’s more important than ever for investors to focus on hard data rather than just the headlines and keep short-term news in perspective. Each risk to the market and economy and their cumulative impact has the potential to cause pullbacks in the financial markets in the near-term, but I am reluctant to fixate on any budding global conflict, be it the coronavirus outbreak, political discord or the trade war as discerning the direction these will take is extremely difficult.

With the impressive returns of last year, it can be easy to enter the new year with the same or even higher expectations. I caution investors against that with a reminder that market corrections and downturns, while uncomfortable, are healthy and often create a range of investment opportunities across asset classes. Market pullbacks are manageable with a well-diversified portfolio utilizing an approach that is well thought out, employs tactics to reduce risk and works to capture upside potential.

As we enter the new year, it is important to have a clear vision of your personal financial plan and I encourage you to contact our office if you’ve had any life changes so that we can schedule a time to discuss your portfolio along with any questions or concerns you may have.

As always, we extend our gratitude for the continued confidence you place in LePage Financial Group and I wish you and your family the very best as we begin the new year.


Steve LePage

These are the opinions of Steven LePage and not necessarily those of Cambridge, are for informational purposes only, and should not be construed or acted upon as individualized investment advice.