Two Issues Facing the Markets in 2020

The two biggest issues facing the markets in 2020 will be /1/ whether US/global economic growth picks up enough to generate higher inflation and /2/ whether the left-wing Democratic presidential contenders will win the nomination and election.   An affirmative outcome to either would be a major negative for the stock market.  At this point, however, neither appears relevant for the next couple of months. 

US economic growth in Q419 is slightly above trend, according to the Atlanta Fed model's latest Real GDP Growth  estimate of 2.1%.  Longer-run trend is viewed to be between 1.8-2.0%.  The decline in the Unemployment Rate over October-November supports this above-trend depiction of Q419 GDP Growth.  However, the Unemployment Claims data have worsened so far in December.  Their higher prints may have resulted from seasonal adjustment distortions in this holiday period.  Or, a pickup in layoffs might have been a lagged response to the slower growth seen in the prior two quarters.  Then again,  they may, in fact, stem from an actual slowing in economic activity.  Boeing's stoppage of Max 737 plane production beginning January could be a significant drag on Q120 Real GDP Growth.  Anticipatory layoffs in supplier industries may have contributed to the increase in the Claims data.

While there has been some modest improvement in European and Chinese business survey data, they are still at low levels.  Germany seems to be particularly soft.  German manufacturers may be particularly hurt by softer demand from China.  Also, it is conceivable they have lost a competitive edge to the US and other European countries because of higher electricity prices that resulted from its shift to renewable energy supplies.  The German Markit PMI is well below those of other European countries.   The loss of a competitive edge within the euro area cannot be offset by a weaker currency.

Meanwhile, US inflation remains low.  The Core PCE Deflator slowed to 1.6% y/y in December.  Possibly even more troubling to the Fed is the University of Michigan 5-Year Inflation Expectations, which fell to a new low of 2.2% in December.

Regarding the presidential race, the left-wing candidates -- Warren and Sanders -- are trailing the more moderate candidates.  The first major test will be on Super Tuesday, March 3, when 14 states (representing 1/3 of the population) hold primaries.  Until then, the presidential election will be more in the background for the markets.