Guggenheim: 10 Macro Themes To Watch In 2020

Scott Minerd, Chairman of Investments and Global CIO, and Guggenheim’s Macroeconomic and Investment Research Group analyze the 10 macroeconomic trends likely to shape monetary policy and investment performance this year.

Among their major themes:

1. Household net worth gains will continue to support consumption, the main driver of growth for the U.S. economy, even with business investment contracting and the manufacturing sector experiencing a recession.

2. The housing market will contribute positively to U.S. economic growth. Mortgage rates have come down a full percentage point over the past year, helping home sales and construction recover, a trend which will continue into 2020.

3. We forecast the Federal Reserve balance sheet, which has been a key driver of markets in recent years, will grow at a much slower pace in 2020, which could undercut the “QE-lite” market narrative.

4. A tight labor market will further depress corporate profit margins in 2020. In an environment of limited pricing power, businesses are struggling to pass on higher labor costs, resulting in declining profitability that should weigh on hiring and investment plans.

5. Corporate defaults will rise as debt burdens weigh on the credit markets. In today’s corporate credit markets, which include more below-investment grade-rated debt and more BBB-rated debt (the lowest IG rating) than ever before, it is unsustainable for firms to operate with historically high leverage without a rise in defaults.

6. Credit rating downgrades will add headwinds to business investment. Weak earnings growth and a continued increase in leverage has resulted in more credits being downgraded than upgraded by the ratings agencies. Lower ratings will make it costlier to take on additional debt curtail business hiring and investment.

7. The Fed’s “soft-landing” may prove elusive, as momentum in the labor market will fade as the pool of unemployed workers continues to shrink and economic growth cools. Historically, once the two-year change in the unemployment rate turns positive, the economy enters a recession.

8. Consumer confidence will hinge on the health of the labor market. For confidence to rise from here, the economy will need to somehow create jobs at a faster pace in 2020, which seems like a tall order given an unemployment rate at a 50-year low.

9. Historically high wealth and income inequality will fuel popular support for economically disruptive policies such as a wealth tax, higher corporate tax rates, universal basic income, and Medicare for all, increasing policy uncertainty.

10. The 2020 election will be more consequential for the economy than any election in the past. Spurred by social media, 24-hour cable news, and high political polarization, consumers are making economic decisions based on political developments.

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