Advanced economy central banks traveled back in time and returned to their easy monetary policies of the past in order to save their future economic expansions. Combined with easing U.S. — China trade tensions, this led to a powerful equity market rally in 2019 with the MSCI All Country World Index rising north of 20% year-to-date.
The global economy appears to be stabilizing. Risks may still be tilted to the downside, but we are not forecasting a global (or U.S.) recession in 2020. Citi’s economists think that global growth will settle in around 2.7% year-on-year in both 2020 and 2021 as global manufacturing activity rebounds. Trade tensions remain a risk with many details yet to be settled, but at least tensions are not rising as they were in early-to-mid 2019.
We think that the bull market remains intact and believe that global equities could return 6.0% to 8.0% in 2020. In the United States, Citi is looking for similar returns with a year-end S&P 500 target of 3,375. Sectors that are most sensitive to the economic cycle (or cyclicals) may have further room to run. However, we are viewing the back half of 2020 through a more defensive lens with the U.S. Presidential election quickly approaching.
The Federal Reserve has signaled that it will likely remain “on-hold” through 2020 and Citi’s economists agree. After hiking interest rates four times in 2018, the Fed has nearly unwound all of those rate hikes by cutting rates three times in 2019. Exactly three rate cuts is consistent with “insurance cuts” of the past (1995-1996 and 1998). We do not envision another rate cut, but the bar is set much lower for a cut than it is for a hike.
There are early signs that growth may be stabilizing
The global economy and financial markets diverged greatly in 2019 with many regions of the world facing downside risks as global trade volumes slowed. This slowdown was felt acutely on the manufacturing side of the economy in many regions. Fortunately, there are some signs that global manufacturing activity may be starting to stabilize (see figure 1).