Published in Finance

Greenleaf Trust exec: ‘Good case” for more stock market volatility in 2020

BY Sunday, December 22, 2019 06:15pm

Investors approach 2020 with a little anxiety from concerns about the future of the U.S. economy that moved into a record period of expansion this past summer, plus the presidential election and other issues that create uncertainty. Nick Juhle, vice president and director of investment research, says investors view the stock market much as they did a year ago: with a sense of uncertainty about how long economic growth can last.

What’s the mood of investors as the new year approaches?

It’s well understood we’re in the midst of the longest economic expansion in U.S. history. Naturally, people are anxious about the prospects of a recession, and from our perspective, it’s not a question of if we’ll experience another recession but when. … As you look back post-World War II, we’ve had a recession on average every five years or so. It’s actually a much more common thing than people realize. The problem is we’re in the longest expansion we’ve ever experienced and that makes people anxious that we’re due for another recession, and that’s compounded by the fact that our most recent experience with a recession was 2008, the financial crisis, which was particularly severe and I would say not a normal experience.

Nick Juhle, Vice president and director of investment research Greenleaf Trust COURTESY PHOTO

I would say heading into 2020, the mood feels a lot like it did heading into 2019. Investors feel like the expansion is long in the tooth. Their anxiety is heightened as they wonder when we’re going to have the next recession and how severe it’s going to be.

A lot of the outlooks are not calling for a recession, but they do predict slower U.S. economic growth for 2020. How is that affecting clients’ decisions?

Typically when people talk about the prospect of a recession, they’ll handicap it based on the odds of having one within the next 12 months or so. There’s certainly a pretty logical story you could tell that we could make it through the next 12 months without experiencing a recession, but there’s also some more pronounced and more binary risks out there as well. I would say generally, though, it’s been supportive of people staying disciplined and staying invested in the market. We’ve seen over the last several years people have been more compelled to buy (in) the dips. Even if it doesn’t seem obvious we’ll have a recession in the next 12 months, people are staying disciplined and keeping their portfolios invested.

Will 2020 bring more or less volatility to the market?

It’s hard to say. When you look back at 2019, we actually experienced relatively little volatility. Going back another year, 2018 was more volatile but it was more of an average level of volatility. How do we think about 2020 as we look forward? It would probably be unrealistic to assume volatility stays as low as it has recently been. Again, there’s a number of things on the horizon that have the potential to cause volatility, and I’m thinking about things like the presidential election, the ongoing impeachment discussion that could bleed into next year, a Brexit deadline of Jan. 31, and the ongoing trade negotiations between the U.S. and China. There are a lot of uncertainties out there that will evolve and proceed through 2020, and depending on how those things evolve, you could make a good case for why there could be more volatility next year than there was this year.

How could the presidential campaign affect the market?

That’s a question we’ve been hearing from many of our clients as we enter 2020. There’s certainly no shortage of bold market predictions out there based on some potential outcomes of the election — and that’s nothing new, either. There’s several well-known hedge fund managers who recently described the type of market Armageddon that could occur if Trump were defeated in 2020. You heard things like, ‘What if Warren gets elected? What if Bernie gets elected? What if ‘insert name here’ gets elected next year?’ There are bold predictions about significant market moves that could potentially occur. History just doesn’t bear these things out.

If you look back in 2016, many experts were predicting that a Trump presidency would derail the markets. More recently, I saw a piece that said that a Trump resignation could cause a rally. These predictions are all over the board and if we look back over the data, presidential election years on average look pretty average. 

Does it matter who’s in control?

I can look back about 84 years just following the Great Depression and on average, an election year’s returns were just shy of 7 percent, and an average annual return is about 8 percent. So it’s a pretty normal experience as far as it goes and it doesn’t really matter, if you look back, who was in power. Over those same 84 years, you had about half the time the White House was occupied by Democrats and about half the time it was occupied by Republicans, and the average return during Democratic years and Republican years were almost spot on the exact same number.

What do you want to hear the candidates talk about next year?

There are a lot of issues we face in our country and one of the things I thought was interesting was when the Fed chair, Jerome Powell, spoke (in November) about trying to take steps to extend this expansion so that it can help to even the playing field and create opportunities for what’s referred to as the ‘last hired, first fired.’ The wealth gap question seems to come into play and it’s an important theme to think about. How can we continue to grow the economy in a way that benefits all Americans?

What worries you as we near 2020?

The things that worry me the most are the things that I have the least insight into and the least ability to predict or expect. There’s a lot of binary events out there. The big topics like Brexit, U.S.-China trade. You run down that list and those are all things that are uncertain but you kind of have some parameters around what the outcomes will likely be at some point and a certain level of expectations that go with that.

I’m worried about that fixed business investment spending component of our economy. It’s paused right now amid the trade uncertainty, but if that’s resolved or at least if there’s some closure on that and it picks back up, then that risk goes away. The longer the trade war drags out, the bigger that risk becomes and it could bleed over into the consumer.

What makes you optimistic?

We have a lot of good things going on in the economy right now. When you think about GDP and the main components that comprise it, the consumer is by far the largest contributor and right now that consumer is amply employed, wages are increasing, which means there is money in people’s pockets if you want to work. We had a record outcome as the retail season kicked in following Thanksgiving. So people are fully employed and they are spending, and that’s a really good thing in terms of maintaining our economy.

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