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2019 Q4

Happy New Year to you all. We look for 2020 to be filled with blessings and joy.

We closed 2019 on a strong note as the markets logged new record highs. On the surface, as tensions appear to ease with China on the back of a “phase 1” trade deal, and the threat of a potential recession fades, we forge ahead into the new year with only minor headwinds – unlike the close of 2018. As we close the books on 2019, let’s discuss the areas we will be paying close attention to in the coming year.

As we stated all through 2019, the probability of a recession was small as the economic numbers we track did not warrant a recessionary concern. The economy slowed as industrial production decelerated due to uncertainty surrounding the trade war with China. Our prediction for 2020 remains largely unchanged. We believe the low point in the economy occurs in the second quarter, with economic expansion beginning in the latter half of the year. Employment strength should remain strong and retail sales could accelerate into the second half. Given this backdrop, we expect GDP for the full year to fall between 1.7-2.0%.

What the markets cannot ignore are the major geopolitical events that are currently in the news. Namely, trade with China, Iran, and North Korea. Regarding trade with China, the potential risks are still there (please see the October 2019 newsletter for a refresher) and we are skeptical that the “phase 1” deal has much substance to it. Additionally, we are doubtful a “phase 2” deal will be completed before the presidential election. With escalating tensions in Iran and North Korea, volatility will likely increase. In general, we expect to see more volatility given the elevated level of the market. Other areas we are watching include the potential for wage inflation, the potential for a progressive overhaul of the economy if political winds change, and the potential for a change to interest rate policy. With that being said, we are optimistic on equity markets for 2020, but less so for domestic bond markets. While we had a corporate earnings recession in 2019 due to tariffs and sanctions, we expect earnings to rise modestly this year. However, given the large run we experienced in 2019, the economy has a bit of “catching up” to do before equilibrium is restored. This is not necessarily bad because it helps mitigate larger swings in the markets, everything else being equal.

For the investment portfolios, we had a very strong year in the equity and fixed income markets. We were able to lock in gains as equity markets moved higher and reallocate these assets into fixed income for those of you with fixed income as part of your allocation. We continue to focus on quality companies that should benefit from earnings growth, strong management, and strategic initiatives. We will look to make potential allocation changes as the year progresses and the economic cycle matures further. Please let us know if you have any questions.

As always, thank you for your trust!

Marc Henn, CFP®, President