At our recent panel event in Boston, Chief Investment Officer Leo Grohowski and Dan Clifton, Head of Policy Research at Strategas Research Partners, discussed the changing economy, the U.S. presidential election, and what investors should expect from markets in the year ahead.
Here are a few highlights from their talk:
Leo Grohowski: Given the robust returns we've enjoyed over the last decade, I worry about complacency among investors. The truth is that, in the next decade, returns will not be as strong as they were over the last decade. The tools we will need to use going forward will be different. Investors will need to think about strategies like after-tax and after-fee investing, but they will also need to look beyond investing in order effectively build their wealth.
This is where BNY Mellon Wealth Management's Active Wealth framework can be helpful. Strategic borrowing and dynamic spending will be important as we move through the late stage of this economic cycle; these are important levers that individuals can utilize to potentially add alpha even as investment returns diminish.
Dan Clifton: The 2008-2009 financial crisis changed our economy and our politics. The economic volatility we've experienced has led to political volatility, and the main driver of these changes has been a major slowdown in economic growth and the lack of broad income growth among most Americans.
Consider that between the end of World War II and the financial crisis, U.S. economic growth was consistently around 3%. Since the crisis, we've been stuck around 2%. Now, that may not seem like such a big decline. But had we been at a 3% growth rate over that time, the U.S. economy would be as much as $3.5 trillion larger than it is right now, and the average U.S. household would be $40,000 richer.
While most people may not be aware of the hard data, they can sense that something is wrong. They understand that their standard of living is not rising; both businesses and individuals feel uncertain about where the economy is headed, which is why the run up to this year's presidential election will be so interesting.
The U.S. Presidential Election
Dan Clifton: While there is a lot of noise around the Democratic primary and upcoming election, it's important to look at how markets perform historically. Presidents tend to flood the economy with stimulus during their third year in office in order to increase their chances of reelection. Since 1948, the average return of the S&P 500 in the third year of a president's term is 16%; for years one, two and four, the average return is only about 6%.
As we approach the presidential election in November, I think President Trump will continue to try and stimulate the economy to better appeal to voters. There are three ways in which I think he can do this. The easiest to accomplish would be to reduce the agricultural and industrial tariffs he has put in place, which will have a positive effect on job growth in states like Michigan, Wisconsin, Pennsylvania and Iowa. Next, he could apply more public pressure on the Federal Reserve in an effort to get it to further ease monetary policy.
The third way — the hardest and least likely option, in my opinion — would be to cut the payroll tax. That would put money right back into people's paychecks in a very obvious way. However, to do that, President Trump would need to cut a deal with Speaker Pelosi and the Democrats. While this seems unlikely following the impeachment proceedings, Speaker Pelosi needs to defend the seats of 30 Democratic House members who represent districts that President Trump won in 2016. Still, I think we'd only see this come about in a real emergency situation for the administration.
As far as the Democratic presidential primary is concerned, I think we may have a long way to go before we know for certain who the candidate will be. Right now, Bernie Sanders is in a strong position — I'd give him the highest probability of winning, around 40%. But ultimately I think the best determinant of who wins will be how many candidates remain in the race. Usually, the Iowa caucus has a winnowing effect because it's clear which candidates have underperformed expectations. But given the uncertainty around the results and the fact that there was no definitive leader, nobody has dropped out and I expect that many of the candidates will stick around longer than we would have expected.
The Year Ahead
Leo Grohowski: With everything going on in the world right now, from the U.S. presidential election, to Brexit, to the coronavirus, it's important to remember that it is earnings and interest rates that drive equity markets. Yes, risks are rising due to political and geopolitical uncertainties and global growth is slowing. But in our 2020 outlook, we expect that continued accommodative monetary policy will extend the bull market and that the U.S. will avoid a recession. We maintain a neutral weight toward equities, given the circumstances, but within that allocation, we are modestly overweight to U.S. equity and underexposed to emerging markets.
We titled our 2020 outlook “A Time for Action," and it's true: this is a time to be active with your wealth, to look closely at how you are allocated, your taxes, your fees and your spending and make the necessary adjustments that will enable you to continue building your wealth even as growth slows and markets become more volatile.