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2020 Global Market Outlook: New Heroes Needed

2020 Global Market Outlook: New Heroes Needed
Key Points
  • In 2020, global economic growth may depend on comprehensive trade deals and fiscal stimulus rather than actions by central bankers to reverse last year’s slowdown in manufacturing and business investment.

  • Unlike 2019’s above average performance for all asset classes, markets in 2020 may offer more of a challenge for investors with the potential for reversals in long-term relative performance trends which could catch investors by surprise.

  • Consider rebalancing back to long-term asset allocation targets to take advantage of potential reversals of long-term asset trends and the desynchronization of global markets’ performance, which may help manage portfolio volatility.

Below is Jeffrey Kleintop’s full 2020 outlook for global stocks and the economy. For more, you can read his previously published summary outlook, as well as the complete 2020 Schwab Market Outlook.


2020 follows an unprecedented year for markets

Like in the fictional hometown of Garrison Keillor’s A Prairie Home Companion, where all the children are above average, 2019 is the “Lake Wobegon” of years for investors.  All asset classes are above average. But in the real world, it is unusual to have cyclical assets (which tend to perform best when the economy is improving), like stocks and commodities, deliver above average returns alongside defensive assets, like gold and government bonds (which tend to perform best when the economy is weakening). In fact, it’s never happened before.

2019: all asset classes were above average

asset classes

Source: Charles Schwab, Factset data as of 11/29/2019. Asset class performance in US dollars represented by the following indexes: S&P 500 Index (US Large Cap Stocks), Russell 2000 Index (US Small Cap Stocks), MSCI EAFE Index (International Stocks), MSCI Emerging Market Index (Emerging Market Stocks), MSCI US REIT Index (US REIT), S&P GSCI (Commodities), Bloomberg Barclays US Treasury Inflation-Linked Bond Index (TIPS), Bloomberg Barclays US Aggregate Bond Index (US Bonds), Bloomberg US High Yield Index (High Yield Bonds), NYMEX Gold near term contract close (Gold).
Past performance is no guarantee of future results.

Why did we see such unprecedented performance across markets in 2019? The year didn’t see any improvement in the global growth of trade, manufacturing, the economy or earnings. But as central banks shifted to interest rate cuts in 2019, investors drove up valuations for international stocks and other assets, believing that central bankers, these “Guardians of the Economy,” possess superpowers to defeat any threat to the global economy.

Guardians of the Economy cartoon

But unlike characters in the Marvel movies that set box office records in 2019, central bankers actually only have one power—to ease financial conditions, primarily through lower interest rates (also see Does The Return Of QE Mean Big Gains For Stocks In 2020?). However, high interest rates aren’t the problem we are fighting right now. For example, Germany was on the cusp of recession in 2019, yet interest rates were below zero. Investors may have misplaced their confidence in the Guardians. The real heroes in 2020 may be trade deals and fiscal policies.

New heroes are needed in 2020

Unless global growth reaccelerates, international stocks may remain stuck within the volatile range of the past two years, given their high sensitivity to economic conditions. In 2020, growth may depend on comprehensive trade deals and fiscal stimulus to reverse the 2019 slowdown in manufacturing and business investment. If tariffs are not lifted before businesses cut jobs, it may undermine the consumer spending that is supporting the world’s economy.

The composite leading indicator (CLI) for the world economy produced by the Organization for Economic Co-operation and Development (OECD) is pointing to trouble. The OECD sees 100 as an important level: above 100, growth is accelerating, below 100, growth is slowing. But, we find 99 to be a more important threshold. Historically, a drop below 99 seems to happen right around the start of a global recession: in early 2008, early 2001, in late-1990, late 1981, mid-1974, and mid-1970, as you can see in the chart below. The latest reading is 99.1.

Global leading economic indicator nearing important threshold


Source: Charles Schwab, Organization for Economic Co-operation and Development, as of 11/29/2019.

The world’s major developed economies, known as the Group of Seven (G7), all have CLIs very close to 99 (ranging from 99.4 to 98.7), reflecting the potential for a global recession. 

But a recession is not inevitable. The global slowdown which began in manufacturing, has recently shown signs of stabilization. The widely-watched global manufacturing purchasing managers’ index ended 15 months in a row of declines and posted four back-to-back months of improvement as 2019 matured. The declines began the month the U.S. and China both put the first round of trade tariffs on each other in 2018. Hopes that we are nearing an end to the trade war may be helping lift manufacturing sentiment.

Signs of improvement in manufacturing

Manufacturing rising or falling

Source: Charles Schwab, Markit data as of 12/6/2019.

If the manufacturing sector fails to recover, those countries with economies that are most dependent upon manufacturing may be the most vulnerable to a recession. These include some of the world’s largest economies, as you can see in the table below. Likewise, if manufacturing were to rebound, these countries may be the most positively impacted.

World’s most vulnerable?

Manufacturing as % GDP nations

Source: Charles Schwab, World Bank most recent annual data as of 12/8/2019.
List of economies with GDP larger than $200 billion.

Although the services sector of the global economy is larger, the manufacturing sector tends to be a good indicator of profit growth in the quarters ahead. Earnings per share growth for global companies in the MSCI World Index dipped below zero in the third quarter of 2019. This deteriorating profit outlook may have contributed to business leaders’ increasingly cautious outlook. Most CFOs surveyed in the latest Duke CFO Global Business Outlook poll see a recession starting sometime next year, with more than half of them seeing a recession by the U.S. election, as you can see in the chart below.

Weak CFO confidence

CFO Confidence

Source: Charles Schwab, Duke CFO magazine survey data as of September 2019

Debating the accuracy of their forecast is less important than actions CFOs are taking in response to this outlook. For example, the survey also shows that CFOs are pulling back on business investment plans for the coming 12 months. The growth rate of business spending on equipment has already turned negative in many economies. Fortunately, businesses have not yet cut back on labor. Employment is consistently strong across economies as different as Canada and China. Remarkably, strength in the labor market can be seen even where the global economy is weakest; employment is at an all-time high in the German manufacturing sector. This labor market resilience has supported the consumer spending that has kept the global economy from sliding into a broad recession.

Consumer confidence is as high in Europe as it is in the United States, as you can see in the chart below. It may seem like a good thing that consumer confidence is high. After all, a strong consumer drives the economy of the U.S. and Europe. Rising confidence from a low level indicates consumers are helping to drive improvement in the economy. But, when confidence is already high, it may mean consumer spending has little room to run and could be vulnerable to slowing. A sudden rise in layoffs could undermine the current confidence, now at levels that preceded prior recessions.

Strong consumer confidence

Consumer confidence - US vs EC

Source:  Charles Schwab, Bloomberg data as of 12/5/2019.

Historically, when demand softened employers reduced output through job cuts—especially in manufacturing industries where excess inventories are costly to maintain and weigh on pricing. Today, unsold inventory has been growing in most major countries. The world’s three largest developed economies highlight the growing global stockpiles: in the U.S. the inventory of durable goods is growing at a near 5% pace, the orders-to-inventory ratio remains below 1.0 in Japan, and the IFO inventory assessment in Germany has recently hit the highest level since the financial crisis. 

Trade deal

Without a trade deal, the heightened tensions that have contributed to the slowdown in demand may not ease. If no deal can be reached between the U.S. and China in the coming months businesses may finally begin to cut back on labor, undermining the key support for the global economy. We continue to monitor trade developments closely, as jobs may depend on it.

Although hard to assess with any precision, the odds of a comprehensive trade deal that revives global growth in 2020 are not zero. After all, there were some major trade deals in 2019. Lost in the escalating trade tensions with China is the fact that the U.S. now has trade deals signed or pending with Japan, South Korea, Canada and Mexico, making up four of the U.S.’s top seven trading partners, accounting for a combined 60% of U.S. trade. 

Some major trade deals were reached in 2019

Trade deal map

Source: Charles Schwab, U.S. Census Bureau data for 2018 as of 12/5/2019.    

Note that U.S. trade with both Canada and Mexico was nearly as large as U.S.-China trade in 2018.  This year could see those levels exceed U.S.-China trade, which has seen a sharp pullback. Looking ahead to 2020, a post-Brexit deal between the U.S. and the U.K. may be coming, along with a deal between the U.S. and Europe tied to autos.

Fiscal stimulus

Monetary policymakers at the Federal Reserve, European Central Bank and Bank of Japan appear to be on hold heading into 2020, after each lowered interest rates in 2019. The leaders of these central banks have been insisting that fiscal policymakers enact stimulus though stepped-up government spending or tax cuts, both made easier by these low interest rates. Starting around this year’s annual gathering of central bankers and finance ministers in Jackson Hole, WY in August, the list of countries focusing on fiscal stimulus for 2020 is growing.

fiscal stimulus

The budget submissions for the Eurozone point to a potential overall fiscal boost of 0.3% to 0.4% of GDP, which could translate into faster GDP growth of 0.2% to 0.3%. While these numbers may seem small, this boost could make the difference between slow growth and a recession, with economies like Germany reporting quarterly GDP growth of +/-0.1% in the past two quarters. Also, these estimates are not far from the estimated 0.3% effect on GDP from the United States’ 2018 tax cut, according to the nonpartisan Congressional Research Service. If more countries jump on the fiscal stimulus bandwagon, it may prove more effective at stimulating growth than additional rate cuts by the central banks.

The economic and earnings outlook for 2020 may depend on how soon might a potential cutback on labor by businesses, as demand continues to fade and unsold inventories pile up, be rescued by a trade deal and/or fiscal stimulus.

What we’re watching in 2020

We can sum up our growth outlook with these key developments we will be watching most closely in 2020:

  • With headwinds from the trade-led slump in output and investment having unequal impacts around the world, recession in some countries is possible. A broad global recession could occur if the manufacturing slowdown spreads to jobs and consumers.
  • An end to the U.S.-China trade war could help to reverse business uncertainty and unleash investment.
  • Government fiscal policy—such as tax cuts or increased spending—may become more important as central bank monetary policy has become less effective in boosting economic growth.

A year of surprises?

The year ahead is unlikely to mirror 2019’s above average performance for all asset classes. Instead, markets may offer more of a challenge for investors with the potential for reversals in long-term relative performance trends which could catch many investors by surprise. It has been over a decade since we have seen a change in relative performance, with some investors having never seen an environment with different leadership.

The yield curve inverts when the yield on the 3-month U.S. Treasury exceeds the yield on the 10-year U.S. Treasury. Many investors focus on this historically negative signal for the overall stock market, as inversions have typically preceded economic recessions. But, the opportunities signaled by a yield curve inversion deserve just as much attention. Inversions often mark a reversal in long-term market performance trends as leaders and laggards change places. Examining the relative performance of growth and value stocks, large and small cap stocks, and U.S. and international stocks we can see that reversals in long-term trends were often marked by inversions in the U.S. yield curve. In 2020, new leadership by value, large-cap and international stocks may follow 2019’s inversion.

Growth to value?

The chart below depicts long-term relative performance trends of growth and value stocks. When the blue line is rising, growth is outperforming value and when the orange line is rising, value is outperforming growth. The shaded areas are periods of when the U.S. yield curve was inverted. 

Changes in growth and value performance trends around yield curve inversions

MSCI growth to value

Shaded areas mark periods when the U.S. yield curve was inverted (3 month to 10 year)
Source: Charles Schwab, Factset data as of 12/5/2019.
Past performance is no guarantee of future results.

Notice that the periods when the yield curve was inverted fell very close to the reversals in the longer-term trend of relative performance between growth and value stocks.

  • In July 2000, the yield curve began to invert about four months after the March 2000 peak in the long-term trend of growth outperformance as value began to outperform.
  • At about the mid-point of the yield curve inversion that began in August 2006, the reversal began in the long-term trend of relative performance as growth stocks started to outperform value stocks beginning in January 2007.

Small to large cap?

The reversal in long-term relative performance around yield curve inversions can be seen in large and small cap stocks composing the MSCI EAFE Index. When the blue line is rising, large capitalization stocks are outperforming small capitalization stocks and when the orange line is rising, small caps are outperforming. Here again, the shaded areas are periods when the U.S. yield curve was inverted.

Changes in large and small cap performance trends around yield curve inversions

MSCI Large cap to small cap

Shaded areas mark periods when the U.S. yield curve was inverted (3 month to 10 year)
Source: Charles Schwab, Factset data as of 12/5/2019.
Past performance is no guarantee of future results.

The periods of inversion in the yield curve fell very close to the reversals in the longer-term trend of relative performance between large and small cap international developed stocks. 

  • In July 2000, the yield curve began to invert about six months after the long-term trend in relative outperformance by large cap stocks ended in December 1999 as small cap stocks began to outperform over the following six years.
  • In August 2006, the yield curve inverted about four months after the reversal in the long-term trend of relative performance as large cap stocks began to outperform small cap stocks. That outperformance trend continued until August 2008 when small caps resumed their trend of outperformance (perhaps signaled by the re-inversion of the yield curve in August 2007 after temporarily becoming upward sloping).

U.S. to international?

For the reversal of long-term relative performance around yield curve inversions for U.S. and international stocks, we look at the MSCI USA and MSCI EAFE Indexes. When the blue line is rising, international stocks are outperforming U.S. stocks. When the orange line is rising, U.S. stocks are outperforming international stocks. We took the chart back to the early 1980s to show a cycle where international stocks outperformed U.S. stocks to a similar degree that U.S. stocks have outperformed international stocks since the last yield curve inversion. Again, the shaded areas are periods when the U.S. yield curve was inverted.

Changes in U.S. and international performance trends around yield curve inversions


Shaded areas mark periods when the U.S. yield curve was inverted (3 month to 10 year)
Source: Charles Schwab, Factset data as of 12/5/2019.
Past performance is no guarantee of future results.

The periods of inversion fell near the reversals in the longer-term trend of relative performance between U.S. and international stocks.

  • In June of 1989, the yield curve began to invert, marking the start of a shift away from international stock outperformance towards U.S. stocks. 
  • In July 2000, the yield curve began to invert as the momentum was shifting away from U.S. stocks toward international stocks, although the definitive change in trend didn’t happen until January 2002.
  • In October 2007, the yield curve inversion that began in August 2006 came to an end and appeared to mark the reversal of the long-term trend of relative performance with U.S. stocks starting to outperform international stocks.

Since the yield curve again inverted in 2019, it is possible the long-term trends in relative performance are again nearing a reversal, potentially signaling shifts to outperformance by value, large cap, and international stocks in 2020.

The track record of the inversion of the yield curve as a signal of a potential bear market and recession on the horizon may have some investors focused on preparing for a more difficult market environment. When markets get difficult, investors often instinctively seek to concentrate their portfolio on what had been leading and eliminate what had been lagging. That instinct might limit investors from seeing opportunity as the yield curve inverts and signals the potential for a reversal in the leaders and laggards.

Resisting the emotional response to difficult markets by maintaining exposure to the laggards through portfolio rebalancing may offer the opportunity to benefit from the potential for a reversal in relative performance trends. It is worth noting that compared to the past 20 years, global stock markets are becoming less synchronized with each other, suggesting a globally diversified portfolio may provide effective management of market volatility. 

Stock markets are moving less in tandem heading into 2020 than for most of 2000s

G20 stock markets correlation

Daily one-year rolling correlation of one month percentage change in MSCI indexes for countries in G20 and Spain.
Source: Charles Schwab, Macrobond, MSCI data as of 12/8/2019.

Measured statistically, the broad trend in correlation between stock markets of the Group of 20 nations (plus Spain, which is a quasi-member), that together make up 80% of world GDP, peaked in 2011 and has since fallen back to levels not seen in 20 years. This lower correlation was sustained even during the sharp stock market drop in the fourth quarter of 2018. Improved risk-reducing benefits from lower correlations may mean a more diversified portfolio—including both U.S. and international stocks, rather than a concentrated domestic portfolio, may benefit investors in 2020.

Key investing takeaways for 2020

We can sum up our investment outlook with a few key takeaways:

  • International stock valuations are below long-term averages, reflecting 2019’s lackluster global growth and fears of potential weakness ahead. As international stocks tend to be more economically sensitive and manufacturing-based than U.S. stocks, they may offer more upside potential should growth reaccelerate. 
  • Consider rebalancing back to long-term asset allocation targets. Historically, long-term asset class trends have tended to reverse following yield curve inversions—that is, when short-term yields are higher than long-term yields—as happened in 2019.
  • Global stock markets currently are less likely to move in tandem than they did in the past. This lower correlation may make broad global diversification across long-term allocation targets more rewarding than holding a narrowly focused portfolio.

What You Can Do Next

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Important Disclosures

The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision.

All expressions of opinion are subject to change without notice in reaction to shifting market or economic conditions. Data contained herein from third party providers is obtained from what are considered reliable sources. However, its accuracy, completeness or reliability cannot be guaranteed.

 Past performance is no guarantee of future results and the opinions presented cannot be viewed as an indicator of future performance.

 Investing involves risk including loss of principal. International investments involve additional risks, which include differences in financial accounting standards, currency fluctuations, geopolitical risk, foreign taxes and regulations, and the potential for illiquid markets. Investing in emerging markets may accentuate these risks.

Fixed income securities are subject to increased loss of principal during periods of rising interest rates. Investment value will fluctuate, and investments, when sold, may be worth more or less than original cost.   Fixed-income investments are subject to various other risks including changes in credit quality, market valuations, liquidity, prepayments, early redemption, corporate events, tax ramifications and other factors. High-yield bonds and lower-rated securities are subject to greater credit risk, default risk and liquidity risk.

Commodity-related products, including futures, carry a high level of risk and are not suitable for all investors. Commodity related products may be extremely volatile, illiquid and can be significantly affected by underlying commodity prices, world events, import controls, worldwide competition, government regulations and economic conditions regardless of the length of time shares are held.

Diversification and asset allocation strategies do not ensure a profit and do not protect against losses in declining markets.


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