Economic Perspective - Mid-Quarter Economic and Investment Review

by Robert F. DeLucia,
CFA Consulting

Summary and Major Conclusions:

• The central theme of my forecast for 2020 is that economic growth will accelerate in both the US and world economies as the year unfolds. The most obvious factor is the easing of trade tensions between China and US with the recent signing of the”phase one”trade truce.
• Much improved financial conditions should also boost economic growth. Changes in monetary policy tend to lead changes in the economy by six to nine months. The favorable impact of increased monetary accommodation should become apparent in economic data as 2020 unfolds.
• Consumer spending, housing construction, and investment in intellectual property and software are likely to remain strong again this year but should be augmented by a rebound in manufacturing and business investment in plant and equipment.
• Based upon the experience of previous epidemics, the recent outbreak of the coronavirus in China will likely have a noticeable short-term economic and financial market impact, followed by a rebound in growth in subsequent quarters.
• The virus is expected to have a disproportionately large impact on the Chinese economy, with a lesser negative economic impact on the surrounding countries in Asia.
• The world economy will likely weaken further in coming weeks, and corporate profits could be negatively affected, but each should improve during the spring months. The equity market should bottom once the number of new infections peaksand beginsto trend lower.
• The impact of the virus on US GDP should be mild, mainly because the US is a relatively closed economy. Compared with growth of 2.3% last year, US real GDP should accelerate as the year unfolds, with full-year growth in excess of 2.5%.
• Fourth quarter earnings per share (EPS) for the companies in the S&P 500 are currently tracking a 2% increase, slightly better than prior Wall Street estimates, with revenue growth of 5%. EPS for the full year increased by an estimated 2%. Overall, operating results and future guidance appear somewhat more resilient than expected.
• The outlook for corporate earnings is murky. My base case assumes a moderate recovery in global manufacturing; slightly higher selling prices and wages; a modest recovery in productivity; and a lower US dollar. The culmination of these assumptions would be a moderate increase in company earnings in 2020, roughly equivalent to the long-term historical average.

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