2020, in many respects, is a tipping point.
Extraordinary wealth and affluence have been created in the post-war era landscape. People, innovations, goods, and capital are moving at lightning speed across borders at rate never seen before. Global equality has increased (even as it’s created more inequality within nations), poverty has reduced, lifespans extended, and peace and prosperity have increased.
But with China and the United States decoupling from one another on technology, a critical piece of the 21st-century economy is now fragmenting in two. Countries across the developed world have become more polarized, increasing the power of tribalism. Add the shrinking of supply chains with changes in the politics, economics, and technology of manufactured goods and services, and suddenly globalization has become bifurcated.
Then there are the economic and geopolitical trends. Both are now cycling downward. The global economy, after emerging from the great recession of 2008 with the longest expansion of the post-war period, is now softening. More economists expect a recession in 2020 or 2021. And the world is now entering a deepening geopolitical recession, with a lack of global leadership as a result of American unilateralism, an erosion of US-led alliances, a Russia in decline that wants to undermine the stability and cohesion of both the US and its allies, and an increasingly empowered China under consolidated leadership that's building a competitive alternative on the global stage.
Here are what we view as the top risks for 2020:
The LEI has now declined in four out of the last five months. The LEI is the most accurate forward looking indicator we have and a contraction has always predated a period of recession.
US institutions are among the world's strongest and most resilient. This year, those institutions will be tested in unprecedented ways. We face risks of a US election that many will view as illegitimate, uncertainty in its aftermath, and a foreign policy environment made less stable by the resulting vacuum.
The decision by China and the US to decouple in the technology sphere is the single most impactful geopolitical development for globalization since the Soviet Union collapsed.
Climate change will create a collision course for corporate decision-makers, who must choose between commitments to reduce emissions and bottom lines.
US policy toward the major Shia-led nations in the Middle East is failing. That creates significant risks for regional stability.
An unknown black swan with the potential to shock both supply and demand, such as the coronavirus, is still ramping up and spreading like wildfire.
There are also flashes of euphoric investor sentiment. The best advisors closely keep watch on the gap between reality and expectations. We do believe that the majority, although warming up to a better-than-appreciated reality, are still overly worried and pessimistic about the current state of business and industry. However, an under-appreciated negative, such as the coronavirus, could wildly shock markets, even while the economy is still showing growth.
Job numbers are strong, almost all indicators show the global economy is growing, and PMI numbers (with the exception of manufacturing in the eurozone and UK) are all showing expansion.
We also remind ourselves of a critical point: stocks don’t need dynamic economic growth to rise. Manufacturing struggled in 2019 and didn’t prevent global stocks from having their best year in over a decade.
In our view, stocks can still do fine in this environment, however, we are currently taking a large cash position at this time and continue to trade our proprietary account with greater frequency.
Nothing herein is intended to be investment advice. Investment in the stock market involves risk of loss. Past performance is no guarantee of future returns. The content contained in this article represents only the opinions and viewpoints of the Interlaken Advisors editorial staff.