The Current Investing Outlook à la “Wizard of Oz”

On the 80th anniversary of the iconic movie’s release, CIO Larry Adam draws parallels between the film’s themes and today’s financial markets.

The state of the economy is paramount in determining the return potential of the major asset classes. We forecast that U.S. gross domestic product will grow 2.2% in 2019 and 1.7% in 2020, averting a recession through at least the 2020 presidential election. Dorothy’s companions’ search for a brain, a heart and courage frame our optimistic outlook.

Our brain relies on the facts, and although there has been a spike in recessionary fears, the data we observe (such as leading economic indicators, real-time activity metrics, employment conditions and history) points to an extension of this record-setting economic expansion. While many pessimists point to the yield curve inversion, inversions historically precede a recession by approximately 22 months.1

The U.S. consumer is the heart of both the U.S. and global economy. Collectively, U.S. consumers represent approximately 70% of the U.S. economy, and U.S. consumption is greater than the economies of Japan, Germany and the U.K. combined.1 With healthy job creation, rising wages and high consumer confidence, this heart should continue pumping.

Business spending is the next largest component of the economy. For the economy to grow more rapidly, businesses will need to find the courage to deploy investment capital and reverse the decline we’ve seen recently.

In this real-life rendition, investors seek guidance from two wonderful wizards – President Trump and Federal Reserve (Fed) Chairman Powell. Trade frictions are beginning to weigh on the economy as a recent poll2 suggested that, for the first time since President Trump took office, more respondents believe the economy is getting worse rather than better. The full implementation of a third tranche of tariffs (on $300 billion of Chinese imports) will squarely affect the consumer. With a presidential election looming, it’d be detrimental to increase consumer costs and potentially send the economy into a tailspin. As a result, this last tranche will likely be postponed or not fully implemented if a deal isn’t secured. With the Fed, it’s simple: it will cut interest rates enough to maintain the momentum of this economic expansion. The specific number of cuts is of less importance. As long as the economy does not fall into a recession, riskier assets like equities should move higher.