Our Experts’ Final Thoughts on the 2020 Outlook
Our Experts’ Final Thoughts on the 2020 Outlook
Timothy Paulson: Welcome to the Lord Abbett 2020 Investment Outlook. My name is Tim Paulson, investment strategist at Lord Abbett. I'm joined with some of our leading investment professionals.
Partner & Portfolio Manager
Kewjin Yuoh: My name's Kewjin Yuoh, I'm a fixed income portfolio manager.
Thomas O’Halloran, J.D., CFA
Partner & Portfolio Manager
Tom O’Halloran: Tom O'Halloran, portfolio manager of the innovation growth strategies.
Dan Solender, CFA
Partner & Director of Tax-Free Fixed income
Daniel Solender: Hello. My name is Dan Solender, director of tax-free fixed income.
Leah Traub, Ph.D.
Partner & Portfolio Manager
Leah Traub: Hi, I'm Leah Traub, a portfolio manager in taxable fixed income.
Partner, Director of Strategic Asset Allocation
Giulio Martini: I'm Giulio Martini, director of global asset allocation and manager of the multi-asset portfolios.
Paulson: We'll be talking about markets today, what's gotten us to this point, what we think that means for the coming year. And key risks to those views that we'll be looking out for.
Paulson: So we look around the world, we've got a lot of bad news, of course, that's still in the press that seems to be fairly persistent. Again, as you called it, Giulio, “end of cyclitis.”
“End-of-cyclitis” refers to the belief that the record length of the expansion leaves the U.S. economy vulnerable to a downturn.
Still relatively anemic growth in Europe, questions around China, even questions around the health of the U.S. consumer or deterioration in lending standards.
Tim Paulson │ Investment Strategist
§ Fixed-income specialist
§ Joined Lord Abbett in 2014
§ 21 years of industry experience
As we think about looking forward, what really hasn't been talked about that you think should be on people's radar screens or is on your radar screen both from a positive potential upside surprise and negative potential? If we can just go around.
Solender: From my perspective on municipal bonds, we look more domestically at the world than internationally. And [at] what's international [that] may impact on keeping our rates where they are comparitively, bringing international investors into a market that’s more domestic.
Daniel S. Solender, CFA │ Partner & Director of Tax-Free Fixed income
§ Joined Lord Abbett in 2006
§ Named Partner in 2008
§ 32 years of industry experience
And kind of what we're seeing that may not be as noticeable, because people don't follow all the headlines above the state and local level, [is that] things are going very well. I mean, we've been talking about that already. But things are going very well in terms of budgets being balanced, pensions getting funded better than they used to be.
And just in terms of the infrastructure spending not being overdone the way it may have been in the past and being done very carefully. So kind of what we're seeing is that things are being managed well—[we believe] we're heading in a good direction. Credit is under control. The main thing we're concerned about is if the stock market does take a hit at some point, if rates rise or whatever it causes to take a hit, that has a real impact on everyone now. I think that has, you know, pension funds will get hit, taxes will be hit around the country.
Get more expert views on the U.S. municipal bond market
Income taxes, capital gains taxes. That really is a big thing right now, what happens in the stock market. And that's impacted by so many different factors, including movements in interest rates and the global economy. So from our perspective [we have] the stock market being important and then just the other part too, the real estate might not be as noticeable to a lot of people--real estate seems to be doing well, but you look at some of the larger markets around the country, it's not doing that great.
Not that it's doing badly. It's just [property] values are not rising partially because of the cap on state and local taxes making some of the benefits of the real estate not be as noticeable as they used to be. So around the New York area, the California area, prices aren't-- as strong as they used to be. And that could carry over and it's something to watch out for.
Traub: Picking up on the global theme, I think the one thing we really haven't talked about yet is just this shift that we've seen from most of the central banks of the world tightening in 2018 to most of them easing in 2019. About 60% of all global central banks have eased in 2019.
Leah G. Traub, Ph.D. │ Partner & Portfolio Manager
§ Joined Lord Abbett in 2007
§ Named Partner in 2012
§ 18 years of industry experience
And now we're looking at 2020 and we're saying okay what next? Right? And when I look at 2020 and I think about central bank policy, we have a lot of liquidity, a lot of global liquidity that's still going to be coming out of central banks. The major central banks are all re-expanding their balance sheets, from the European Central Bank to the Fed, although in a low-risk kind of way through T-bills [U.S. Treasury bills].
A Treasury Bill (T-Bill) is a short-term U.S. government debt obligation backed by the U.S. Treasury Department with a maturity of one year or less.
The Bank of Japan is still buying. So we're seeing this resurgence in global liquidity. And a lot of central banks have eased. We do think the outlook for growth looks a little bit better. So I actually am looking at 2020 and thinking that central bank policy is not going to be a big driver, as it was, in 2019.
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It really isn't. It's going to be a lot of the major central banks are on autopilot, at least for right now. The European Central Bank has laid out what they're going to do. The Fed wants to wait and see. Obviously they'll act if something changes in the situation. I don't think they want to act right ahead of the [U.S.] elections. And then a lot of other countries, emerging market countries, they take their cues from the major economies. And if growth is picking up a little bit, they're not going to be rushing to put their interest rates even lower, and hurt their currencies potentially.
So I actually think going into 2020 we're going to care a lot less about what's going on with the central banks and really focus on the growth in [economic] indicators. But I think that's definitely an interesting change to what we spent a lot of 2019 talking about.
Martini: Well, I'm a Sherlock Holmes fan. And I think the way to resolve the mystery of how we've had such a long period of good asset market returns-- interest rates very low, equity market valuations above historical norms, spreads tightening to sort of below historical norms in many parts of the credit market--is that the inflation dog hasn't barked yet.
Spread is the percentage difference in current yields of various classes of fixed-income securities versus Treasury bonds or another benchmark bond measure.
And I'm really worried that the inflation dog is going to start barking because at that point I think we lose this wonderful thing where we've had economic growth without stoking fears of rising inflation. When economic growth is good and inflation fears don't go up, it's just unambiguously positive.
Giulio Martini │ Partner, Director of Strategic Asset Allocation
§ Joined Lord Abbett in 2015
§ Named Partner in 2017
§ 34 years of industry experience
And if we lose that because we start to see the tension between growth and inflation arise, then the dog is going to be barking and telling us that we're moving into a different world. And if you look historically, the only time in U.S. history that looks like low and stable inflation as we've had for the past decade and more is the 1960s. And the 1960s were the prelude to inflation rising and eventually getting out of control in the 1970s.
And I'm not saying we're there yet. And I admit to being a child of the '60s and the '70s. So this is maybe a personal paranoia. But I think that's something we really have to start thinking about and watching out for.
Yuoh: My top-of-mind topic is somewhat related to Giulio's in the sense that this divergence between valuations and fundamentals is very stark to me. We've talked about fundamentals, hearing how we feel generally good about potential trade deals and the strength of the [U.S.] consumer and everything else.
Kewjin Yuoh │ Partner & Portfolio Manager
§ Joined Lord Abbett in 2010
§ Named Partner in 2012
§ 25 years of industry experience
But you can look at valuations on several metrics and just compare them to the fundamental environment and you look at valuations now and they look very full. Right? Economic data is softer. Now we should probably get a rebound after 75 basis points of rate cuts [in 2019 by the U.S. Federal Reserve].
A basis point is 1/100 of a percentage point.
But even taking into consideration rebounds and lower volatility and everything else, valuations are still very full. And so coming to terms with that and figuring out why that is and how do you work around that going forward, and the thought that we have is that one thing you have to recognize in these markets is this notion of level versus momentum.
Valuation levels right now don't necessarily represent the fundamentals. But in this day and age, with the information that's available, the data that's available, there's a lot of momentum to the markets. And so having to square that in terms of understanding what relationships are persisting there and then also marrying that with how valuations look versus fundamentals, to me, that's the biggest challenge in 2020.
O’Halloran: And I'd say I'm bullish on equities going into 2020. I think the tech revolution, which I've talked about a little earlier today, is working its magic. In consumer there's a great push to spending from e-commerce, from social networks, from the rising value of services [and] experiences.
Thomas O’Halloran, J.D., CFA │ Partner, Director of Strategic Asset Allocation
§ Joined Lord Abbett in 2001
§ Named Partner in 2003
§ 32 years of industry experience
Streaming is one recent example which is a good growth driver for movies. It creates better advertising opportunities. In health care the biotech drugs are much better than the ones 20 years ago. The devices for treating things like diabetes are much better. And the diagnosis [capabilities are] vastly enhanced.
In tech itself cloud computing is still growing 20% a year [according to data from IDT]. 5G will be growing faster than tha [in our view] and artificial intelligence faster than 5G. So there's a tremendous amount of good things happening with the tech revolution which is providing a tailwind for consumer spending, and at the same time suppressing the rate of inflation. Now if you look at the processing gains that are expected from the tech revolution, that force is expected to only get more powerful. So I use technical analysis and I see the S&P north of 3100. To me that's a good thing. I view that as confirmatory that the situation is healthy in the United States, the system of laws is very robust, inflation's under control and we're going higher.
Get more expert insights on Innovation Investing
And if the rest of the world can get its act together, it can probably do better than the United States this year [in our opinion]. The United States market itself probably is restrained by the election. But I think it will be up. And the rest of the world—China, emerging markets, Europe—if they can resolve some of these issues could do better than the U.S. But generally speaking it's a very good environment for equities, in my mind.
Paulson: Thank you all. So a lot of different narratives we hear going on here. Some potential upside surprise outside the U.S. A fairly benign outlook in the U.S., with consumers strong and the labor market strong, but maybe some fragility within the consumer in the ability to keep spending. Something we're keeping a close on eye on, certainly.
Central banks are accommodative and likely to remain so and kind of be on hold. Overall, [these conditions] should be generally positive for risk assets but we expect some volatility as we navigate the rest of the year. And we look forward to having everyone share ideas once again [next summer] as we go through uncharted waters.
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Fed refers to the U.S. Federal Reserve.
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