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2020 economic outlook: Things are still looking up, for now.

All the headlines this year about the inverted yield curve, slowing gross domestic product, and United States-China trade war may have you worried about a looming recession. But there are also signs pointing the other way, toward economic growth. Consumer spending has been strong and unemployment low. Meanwhile, surveys for small businesses show that many owners are optimistic, which typically means companies are happy to spend and invest in their businesses. 

We expect some economic growth in 2020 ...”

Robin Anderson, senior economist

Against this mixed backdrop, “we expect some economic growth in 2020, but those with high expectations are likely to be disappointed,” says Robin Anderson, senior economist for Principal Global Investors. 

A slight rebound  

For 2020, Anderson expects to see some economic bounce up, but it’ll be modest. Why? First, economic stimulus in China is milder than before. In past rounds of stimulus, China’s building spree boosted demand for raw materials such as copper or steel, lifting prices worldwide, and keeping global companies very busy feeding that demand. Now, China is doing things like modestly lowering interest rates or introducing tax cuts. While those moves might help stimulate economic growth in China, they won’t do much to stoke growth worldwide. Also, the U.S. has already seen 11 years of economic growth, and there are signs that’s going to slow down or stop.  

Even though unemployment is low right now, job growth has slowed over the last year. There are also signs that profit growth is slowing, while banks are being more stringent with loans. That could mean it’ll be harder to get a loan for a kitchen reno. It also means it could be tougher for businesses to get the capital needed to expand. Then there was the yield curve inversion earlier this year (here’s a quick definition).  All these signs point to growth slowing or stopping, and when that happens, markets generally decline.

Watching for signs of recession  

A recession is the normal part of the business cycle—it peaks and drops. These are some long-term warning signs of economic decline to watch for in 2020. One thing to remember: The next recession won’t likely be as bad as 2008. We don’t expect the consumer debt and housing driven recession we saw back then.

Corporate profits

Corporate profits are typically a reliable indicator of business sentiment. Right now, corporate profits are under pressure because wages have been on the rise. Low unemployment rates (unemployment was at 3.5% in November, the lowest since the late 1960s) have caused companies to raise salaries to keep or attract employees. Unless revenue also increases to compensate for the higher wages, we expect wage increases will cut into corporate profits.  If profits are down, businesses may cut costs; this could mean your employer won’t be upgrading software or building that new office space come late 2020 or early 2021. (In other words, savor your raise and new equipment while you can.)

Inverted yield curve

The inverted yield curve caused worry earlier in 2019, then faded into the rearview mirror. However, we see it as a very reliable long-leading indicator of recession. When yields for short-term debt are higher than yields for long-term debt, economic experts are typically worried about the long-term outlook. Inverted yield curves can precede recession by more than a year, so Anderson sees this as more of a risk for 2021. 

Interest rates

Interest rates have been at historic lows for some time now, and the U.S. had three rate cuts in 2019. When interest rates move down significantly, it may be a warning sign of economic stress. If the economy pans out as we expect (meaning it’ll be OK this year), the Federal Reserve should hold off on any further interest rate cuts in 2020. That means interest rates on savings accounts should stay stable for a while.

Overall, 2020 can still be a good time to consider making a big purchase or taking out a loan.

Long-term interest rates, which affect things like mortgages, may move up slightly in 2020 if global growth bounces back. But that shouldn’t be anything to worry about if you’re thinking of buying a home this year. Rates will likely still be low—just probably not the super low rates we saw in summer and fall of 2019. Overall, 2020 can still be a good time to consider making a big purchase or taking out a loan. “The economy still appears to be growing pretty well,” Anderson says. “You could generally feel confident to make those types of purchase for a little while longer.”

Plus, interest rates could move back down in 2021 because we anticipate economic growth to slow to a standstill.

So, what does this mean for your investments? 

You probably saw some great returns in 2019. While we don’t think we’ll see a decline in the economy in 2020, don’t expect these same types of returns. That’s not to say your investments won’t do well—but you might be a little disappointed in their performance this year compared to last.

But we could see some volatility. If you’re in a target date fund, you can stay the course—remember you’re in it for the long haul. If you choose a mix of investments in your 401(k) or Roth IRA, Anderson suggest investments with more of a focus on large-cap stocks and high-quality bonds. Small-cap stocks and low-quality bonds usually get hit harder when economic growth falters. By 2021, real estate may be another investment that shouldn’t be hit as hard by a slowdown.  

“Companies with strong balance sheets and healthy cash flows are more likely to outperform,” Anderson says. Watch manufacturing carefully (which has seen a significant decline in corporate profits).  

Some rebound in global growth could mean there are opportunities to invest in international or emerging market stocks, which could do better than U.S. stocks for a while. Some resolutions to trade tensions between the U.S. and China could help boost not only China, but also emerging markets in Asia. Still, these signs of global economic growth may be temporary. Brace for slight downturn ahead, if not in 2020, then 2021.  

What can you do?  

Check your portfolio for 2020. Markets and economic conditions are always changing. Log in to your retirement account periodically to check your investment mix and make changes as needed.  If rebalancing and investment decisions aren't your thing, consider a robo-advisor.

Get help from a financial professional.  A professional can help you create or adjust your investment portfolio and make sure it’s on track with longer-term goals like retirement. Find one near you.

Unless otherwise noted, the information in this document has been derived from sources believed to be accurate as of December 2019. Information derived from sources other than Principal Global Investors or its affiliates is believed to be reliable; however, we do not independently verify or guarantee its accuracy or validity. This material contains general information only and does not take account of any investor’s investment objectives or financial situation and should not be construed as specific investment advice, recommendation or be relied on in any way as a guarantee, promise, forecast or prediction of future events regarding an investment or the markets in general. The opinions and predictions expressed are subject to change without prior notice. Any reference to a specific investment or security does not constitute a recommendation to buy, sell, or hold such investment or security, nor an indication that Principal Global Investors or its affiliates has recommended a specific security for any client account.   

Subject to any contrary provisions of applicable law, Principal Global Investors and its affiliates, and their officers, directors, employees, agents, disclaim any express or implied warranty of reliability or accuracy and any responsibility arising in any way (including by reason of negligence) for errors or omissions in this document or in the information or data provided in this document. 

This document is intended to be educational in nature and is not intended to be taken as a recommendation.  

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