Russell Investments’ strategists expect economic rebound in 2020

Annual market outlook report pushes the risk of recession further out to late 2021

SEATTLE, December 10, 2019 — Russell Investments’ market strategists believe the stage is set for a global economic rebound in 2020, due mainly to central bank easing and the cooling China-U.S. trade war. The global team’s newly posted annual outlook report pushes the risk of recession into late 2021, giving equity markets modest upside potential for 2020.

"Hold the epitaphs—this aging cycle seems likely to last beyond 2020," said Andrew Pease, global head of investment strategy at Russell Investments. "Central bank easing, the de-escalation in the trade war and tentative green shoots in global manufacturing suggest we might be on the cusp of another mini-cycle recovery through the first half of 2020."

Russell Investments’ strategists expect low inflation will keep the U.S. Federal Reserve (the Fed) on hold during 2020. However, the team expects the Fed would move to a tightening bias by year-end if bond market inflation expectations rise from the year-end 2019 level of 1.7% toward 2.2%. Expecting the November U.S. presidential election to persist as a major source of uncertainty through most of 2020, the team believes the continuation of low unemployment and trend economic growth favor President Donald Trump’s re-election.

The strategists highlight the following economic indicators in their 2020 outlook:

  • The team believes economic slack is limited at this advanced stage of the cycle. Nowhere is this more apparent in their view than in the U.S., where an unemployment rate of 3.5% in late 2019 is causing wage pressures to build.
  • They expect U.S. non-farm payrolls growth to remain above 100,000 per month in 2020, which should lower the unemployment rate further—to levels not seen since the Korean war in the early 1950s.
  • A Fed on hold and an improving U.S. economy should lead to higher Treasury yields and a steeper yield curve. They believe the 10-year U.S. Treasury yield could rise to around 2.25%.
  • With Italian 10-year government bond (BTP) yields under 1.2% in late 2019, mirroring declines across Southern Europe, the team sees support for stronger financial conditions across the region.
  • The team expects China will increase local government bond issuance to boost infrastructure spending, but they believe GDP (gross domestic product) growth is unlikely to rebound and remain near 6%.

The strategists also offer the following assessment of major asset classes at year-end 2019:

  1. Equities: More optimistic
  2. The team has a small underweight preference for U.S. equities, driven mostly by expensive valuation, but also because the cycle conditions appear firmer outside of the U.S. They favor non-U.S. developed equities. They also believe UK equities offer good value.
    Regarding Japan and Europe, where valuation is neutral, the strategists believe both markets will benefit from fading trade-war concerns. They also like the value offered by emerging markets (EM) equities, as they believe the asset class should benefit from regional central-bank easing and China stimulus. The smaller scale of the China stimulus, however, limits the upside for EM.

  3. Fixed income: Shifting toward a negative view
  4. High-yield credit is slightly expensive and at risk from slowing corporate profit growth. Investment-grade credit is expensive, with a slightly below-average spread to government bonds and a decline in the average rating quality. Government bonds are also universally expensive. The team believes U.S. Treasuries offer the most attractive relative value.

  5. Currencies: Preference for Japanese yen
  6. The Japanese yen remains our preferred currency. It remains undervalued despite this year’s rally and has safe-haven appeal if the trade war escalates. A mini-cycle recovery as the trade war is resolved, at least temporarily, could see the U.S. dollar weaken, given its counter-cyclical tendency. British sterling is very undervalued, but it has upside following the UK’s Dec 12 election.

More details on the 2020 Global Market Outlook are available here.

About Russell Investments
Russell Investments is a leading global investment partner providing tailored solutions and services to institutions and individuals through financial intermediaries. Russell Investments is dedicated to improving people’s financial security, leveraging an 83-year client-centric heritage rooted in investment innovation. The firm is the fourth largest adviser in the world with $292.7 billion in assets under management (as of 9/30/2019) and $2.6 trillion under advisement for clients in 32 countries. Headquartered in Seattle, Washington, Russell Investments operates through 21 additional offices in major financial centers such as New York, London, Tokyo and Shanghai.

Steve Claiborne,