Hello everyone and welcome. As we say goodbye to 2019, we can quickly sum up returns from last year as very, very strong. Indeed, risk-reducing and risk-seeking assets both generated strong returns across the board, around the world. But it’s also important to note that the largest amount of that did not come from growth, neither economic nor earnings, but rather from policy, which is something we’ve been dealing with within markets for some time. In this case, the biggest driver was the reversal, if you will, of many central banks around the world, led by the Federal Reserve, from a tightening bias to an easing bias and eventually cutting. And then in the fourth quarter, a move toward a phase 1 trade deal with China. So the question is, what happens as we go into 2020?
Well, interestingly enough, there is a question mark in play that was more or less the same one that we entered 2019 with, which is the tug of war between labor and economic activity. Labor is strong. And you see that in the form of consumer confidence numbers. And they should feel confident, because jobs means the ability to consume remains high. And in some ways, the equity market has mimicked that confidence and shirked off the weaker economic activity to those returns that I talked about. However, on the other side of the ledger, corporate CEOs don’t feel very confident, and they don’t feel very good because of global trade and its impact on their decision making, an uncertainty. And in some ways, you could almost argue that the bond market reflects that uncertainty and that poor economic activity. But what I would suggest also is that when you get a year where risk-seeking and risk-reducing assets are both up strongly, there is usually one singular driver. And we had that again this time, and that is falling rates.
And so what does it look like as we go into 2020? Well, first, it’s going to be about growth. And we think economic growth is going to be this same sort of moderate level, but actually a little bit lower - We see decelerating growth to something that’s below trend. And from a policy perspective, the Federal Reserve has indicated, at least by their dots chart, that they don’t plan to move this year. We would actually, as a base case, believe that they’re going to cut. And the reason is because economic activity, as of yet, has not stabilized, and we believe this will ultimately lead the Fed to cut rates. Now, for you as an investor, what should that mean in terms of returns? Well, if you have accommodative central banks and moderate growth, then generally speaking, let’s suggest that that would be mid to upper single digits in terms of equity returns and earning something around your coupon as it relates to bonds. However, as always, it’s important to note that investors shouldn’t build a portfolio around the base case. They should be building it around the downside. And there is plenty of downside in the world. And this year, it will be magnified by the U.S. presidential election.
Now, getting into all the details of what could or might happen is probably beyond the scope of this video. So, I’ll give you two things: One, expect heightened volatility - There is an obvious one. The second is, expect fat-tailed events. What does that mean? The policies of either side, you could argue, could move markets higher or could cause difficulties in markets. And, so as an investor, I have the possibility of greater upside and the possibility of greater downside. So how should I navigate that tall order? Well, pretty much the same way we’ve talked about for some time, and that is to both participate and defend, which is challenging but completely doable. What does participate mean? It means I want to be present in markets that could have solid, if unspectacular, returns. But I must defend, because a downside inside of my portfolio that could wreck my retirement plans is something I have to avoid mightily at this stage in the retirement lifecycle for many of the developed world’s investors.
So how do I do that? And here the prescription is the same that we’ve talked about for a while. Let’s begin on the equity side. We have to focus on those factors that are late cycle champions, things like quality of balance sheets, free cash flow generation and the like. And on the fixed income side, or the safety side of the ledger, one of the things that’s been a trend for a while is a move away from core fixed income with flows getting out of that space. I would suggest that you should not abandon your core, but rather become more efficient within it. The number one way to do that, as we’ve talked about for many years, is to globalize your fixed income and diversify your economic cycle risk. And, for pure income seekers, we continue to suggest a credit barbell - The marriage of high grade bonds with high yield bonds.
Portfolios require efficiency as we go forward, because we do have a moderate return environment for the foreseeable future, but with those risks abounding for all of us as investors. These are the topics that we will continue to explore as we go through this new year and beyond. But for now, thank you as always, for joining, and we’ll see you next quarter.