Adviser predictions on how economy will perform next year

Advisers expect the dawn of a new decade to add another year to the nation’s longest economic expansion and a twelfth year of a bullish stock market. Their greatest source of worry? Political uncertainty due to the 2020 elections.

Nearly 70% of advisers expect the economy to remain strong or improve in the year ahead, according to advisers surveyed by InvestmentNews last month. That’s compared with 54% feeling that way heading into 2019 and 80% going into the previous year.

Even the fear of a looming economic recession that seemed to hang over the markets for much of 2019 didn’t rate high among adviser concerns going into 2020. Despite telltale indicators like last summer’s inverted yield curve, just 16% of advisers said they are either very or extremely concerned about a recession in the year ahead. However, it’s coming, they said.

About 62% of advisers said they expect the U.S. economy to fall into recession within the next three years. Of that group, four out of 10 think the next recession will be in 2020, while about half the group predict it will be in 2021.

“We’re not seeing signs of excess in this economy,” said Michael Reynolds, investment strategy officer at Glenmede. “I would characterize our view as optimistic. To be a pessimist right now you have to think a recession is coming.”

He pegs the chance of a recession in 2020 at about 10%.

But even with the widespread faith in the strength of the U.S. economy, the asset allocation plans among advisers suggest growing concerns about a stock market that is nothing if not long in the tooth.

The InvestmentNews survey, which gathered responses from 353 advisers in November, showed plans for a net decrease in equity allocations for the third consecutive year.

As the S&P 500 Index closes in on a 25% gain for the year and is up nearly 240% from the market’s bottom in March 2009, advisers are generally bracing client portfolios more defensively.

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About 30% of advisers plan to decrease exposure to equities in 2020, while just 13% plan to increase equity exposure, for a net decrease of 17%. That compares to net 23.5% of advisers decreasing equity exposure heading into 2019, and net 10.5% heading into 2018.

“We enter every year being both cautious and optimistic, and we try to prepare client portfolios for 15% moves up or down, but we do believe we’re in the late stages of this market,” said Mike Kurz, chief executive of OverShare Advice and Planning.

While more advisers might be trimming than adding equity market exposure, advisers show a growing appetite for fixed income, liquid alternatives, and cash, all of which have at least net 20% adviser support going into 2020.

“We think 2020 is seminal in that we have a presidential election, a new decade, and the beginnings of a generational shift all coinciding,” said Leon LaBrecque, chief growth officer at Sequoia Financial Group. “We’ll be looking at trade and the global markets. We’ll be rebalancing and more importantly, planning for uncertainty.”

As risk factors go, 56% of advisers said they are either very or extremely concerned about the current U.S. political climate. That’s up from 49% a year ago, and 45% two years ago.

“If we get a left-leaning president, like an Elizabeth Warren or a Bernie Sanders, the stock market will be down 20% to 25%, but I don’t see that happening,” said Mike Mullaney, director of global markets research at Boston Partners.

“If a centrist like [Michael] Bloomberg gets elected, I don’t see a radical change,” he added. “But if Trump is reelected, it will be more of the same for the markets.”

Dennis Nolte, vice president of Seacoast Investment Services, also believes the financial markets are already factoring in the reelection of President Donald J. Trump in November.

“We will have a normal market correction at some point in the year, but unless a Democrat wins, the markets already are pricing in relatively stable government regulations and tax policy,” he said. “If a Democrat wins it might be a protracted correction, especially if somebody gets into office that is promising all these giveaways.”

Trade tensions and tariffs are risk factors that a third of advisers cited as being very or extremely concerning. The trade and tariff question was not included in InvestmentNews’ past outlook surveys.

Geopolitical shocks represent a risk factor that 28% of advisers listed as very or extremely concerning, which is down from more than 36% during each of the past three years. The risk factor advisers are least concerned about in 2020 is rising interest rates, with just 5% reporting they are very or extremely concerned about the U.S. Federal Reserve reversing course and hiking rates next year.

That stands in stark contrast from the same time last year when more than 17% of advisers cited higher rates as a top concern. At this time last year, the stock market was experiencing a 20% fourth-quarter pullback and all eyes were on the Fed, which gave the market what it was hoping for in 2019 with a string of rate cuts.

“The Fed has been the single most prominent driver of the markets since the financial crisis, and if the Fed turned hawkish it would be a significant risk for the markets,” said Doug Cohen, managing director of Athena Capital Advisors. “But we think the Fed will stay on the sidelines.”

Related Topics: Economy