Annual Review & Outlook

With the turning of the calendar to a new year and new decade, we take this opportunity to grade our predictions from last year and share a few thoughts, not just about the next twelve months, but for the decade to come.

We finished 2018 with a score of 8 for 13. Last year, we fared almost as well. We take some solace in knowing that we made more provocative predictions than usual; we were 7 for 14.

Our predictions for 2019 were as follows:

·        Global growth of GDP remains stable (Growing at ~5%) however the US slows to 2% – While preliminary full year results won’t be available for another month, initial global GDP growth looks to come in around 3.4% & US GDP at 2.3%; emerging and developing economies are leading growth (4.6%), but lower than forecasted levels: CORRECT

·        Equity returns from Asia and Europe (+14%) will top those from the US (+10%) – Although directionally correct, missed on magnitude and relative performance; US stocks rose 31% and foreign stocks climbed 21%: WRONG

·        Inflation does not accelerate and remains below 2.1% – An aggressive prediction at the time, US CPI ex Food & Energy came in at 2.3%, although inflation remained stable YoY, it did exceed 2.1%: WRONG

·        The US Dollar loses ground against other developed and emerging currencies – The US Dollar Index rose less than a quarter of a percent, however it did rise: WRONG

·        Emerging market debt provides greater returns than US government and corporate bonds – JP Morgan Emerging Market Bond Index returned 16% versus nearly 9% for Bloomberg Barclays US Aggregate Bond Index: CORRECT

·        US Bonds produce marginally positive returns – All significant US bond sectors provided solid returns in 2019: WRONG

·        The FOMC raises rates once at its December meeting – While the Fed did cut rates in 2019, our prediction a year ago was made at a time when markets were pricing in four increases. We were not bold enough: WRONG

·        Cryptocurrencies stabilize with Bitcoin appreciating 8% – Bitcoin nearly doubled during 2019 ending the year at $7,158: CORRECT

·        Amazon and Berkshire Hathaway will both announce large acquisitions – Amazon did not announce another purchase the scope of Whole Foods and Berkshire ended the 3rd Quarter with $128 billion in cash: WRONG

·        Energy prices climb, oil ends the year at $58 while peaking at $68 – Oil peaked in April at $66.30, averaged $57.00 and finished the year at $61.06: CORRECT

·        No category 3 or stronger hurricanes hit the United States, but record year for tornadoes – It was a mild hurricane season, and tornadoes nearly reached the record set in 2017 with 1,418: CORRECT

·        After two months, politicians compromise, and the government goes back to work: Trump gets his ‘Wall’ and there is partial immigration reform – The government did go back to work with workers receiving back pay and Trump did receive additional funding for his wall, but immigration reform remains elusive: CORRECT

·        The UK undertakes another vote and cancels BREXIT – A miss and not likely with Boris Johnson as PM: WRONG

·        Mike Pence is still VP in a year: CORRECT

Investment returns for 2019 were universally strong. Public market equities both domestically and abroad delivered impressive results. Despite trade uncertainty earnings grew while investor confidence grew more, resulting in multiple expansion. Low default rates in credit supported the bond market, resulting in continued support for low interest rates. The search for yield remains challenging for savers and the outlook is not improving.

Sentiment for the economic outlook remains constructive here in the US and most economists do not foresee a recession on the horizon. This is remarkable in that it has been more than a decade since the last downturn. It is important to note that there is no economic law that says economies need to enter a recession periodically. It has been more than 30 years since Australia has experienced one.

Our expectations are for more of the same, regardless of the rhetoric coming out of Washington. We see economic growth activity hovering around the 2.0% mark if real interest rates remain negative (the yield on the 10-Year US Treasury is less than the inflation rate). With current valuations we expect mid to high single digit returns for risk assets and bonds returning little more than the rate of their coupons. The risk/return profile does not appear nearly as attractive as it did a year ago and we would not be surprised if sentiment falters due to a period of stagnating stock prices and increased volatility.

Our predictions for 2020 and the decade ahead:

·        Global GDP accelerates closer to 5%, however, the US remains stagnant at just over 2%

·        Equity returns from Asia and Europe (+15%) will top those from the US (+8%)

·        Inflation remains stable at 2.3%

·        Emerging market debt outperforms US government and corporate bonds

·        The FOMC does not adjust the target Fed Funds Rate

·        The UK Brexits and it proves to be far less disruptive to the UK and EU economies than feared

·        Amazon and Berkshire Hathaway will both announce large acquisitions (repeat from 2019)

And at the end of the decade ahead:

·        New electric vehicle sales exceed those with ‘conventional’ internal combustion engines in developed markets

·        The growth in CO2 emissions declines to near zero and carbon capture technology brings net reductions into sight

·        Healthcare crisis morphs as new technologies prove incredibly disruptive (i.e. the diabetic condition is all but eliminated, significantly reducing ancillary healthcare costs) and cost is no longer the prevailing concern

·        Bitcoin and other cryptocurrencies become fully convertible with the US Dollar and are a widely accepted

·        The Electoral College in presidential elections is alive and well, but Rank Choice Voting becomes common place

·        Minnesota Twins will beat the New York Yankees in a Playoff Series

We look forward to sharing our updated thoughts on these and other issues in the quarters and years ahead.

Wishing you a healthy and prosperous 2020!

Please reach out to continue the conversation.

-EPIQ Partners