Monthly Insights: December 2019

As 2019 comes to a close, the Allegiant Investment Research team is gathering for our annual Economic & Investment Outlook Summit. The first section of our outlook summit entails reviewing our forecast for the prior year. We do this for a few reasons - partially to see how accurate our projections were, but more importantly, we do it to understand how our thinking was flawed. Was it a matter of timing; did something happen that we did not discuss; or were our expectations flat out wrong? Understanding - and improving - our thinking process is an essential part of the team’s philosophy.

From last year’s summit our major economic theme for 2019 was “Good, but Worse.” We thought the U.S. economy would continue to grow, albeit at a slower pace. The economy faced two major headwinds that would slow growth. The first, “Slowbalization” came out of our concern over rising trade barriers negatively impacting growth across the globe. The second major headwind was mainly technical in nature, the year-over-year comparisons to strong tax cut fueled growth in 2018 would make 2019’s growth more difficult.

The wild card was the U.S. stock market. In December 2018, I wrote about how sometimes markets deviate from economic reality for short periods of time. Going into 2019, the U.S. stock market had sold off nearly 20%. Without signs of an imminent recession, we thought markets would rebound, even as economic growth began to moderate. In fact, that’s exactly what we experienced. The move up was more dramatic than expected, as corporate earnings flatlined and most of the stock market’s rise was due to multiple expansion, i.e. investors paid more for the same amount of earnings. While nice, this is unsustainable over the long-term.

This year I could say the exact same thing, “Sometimes markets deviate from economic reality for short periods of time.” However, this time around, market movements are more optimistic than economic reality. That doesn’t necessarily mean it will reverse next year. However, we cannot count on unlimited multiple expansion forever into the future. Eventually, economic reality meets market pricing.

AllegiantPA Economic Dashboard Portrait December 2019
To preview our thoughts for the coming year, the current state of Allegiant’s Economic Dashboard is a perfect depiction of how we view the world today. With one red indicator, two yellow indicators, and three green indicators, the ho hum economic reality of today means things could change on a dime. In a world of sluggish growth, even small changes can have dramatic impacts on the economy, both to the upside and downside. For 2020 we expect “Synchronized Sluggish Growth” to continue throughout much of the world. The Goldilocks scenario of low inflation, low interest rates, and sustainable growth appears stable. There is still untapped potential in the U.S. economy, and we are looking for any potential shocks to the system that will take the economy off the current trajectory.

Over the coming months we will share our final thoughts from our summit.

In the meantime, if you would like to see more data and charts about the economy and various financial markets, please see our Monthly Insights book.

Benjamin W. Jones, CFP®, AIF®
President, Chief Investment Officer, Principal