No one expects 2020 to be a replay of 2019. Nor do any professional investors think the financial markets will display the same spectacular returns in the next decade that they did in the last.

Predicting 10-year equity market returns is no simple feat, but it’s a lot easier to estimate long-term results than what might occur in any given year, notes Brian Nick, chief investment strategist at Nuveen. At the start of the decade beginning in 2010, models would have indicated that equities would have averaged about 10% annually as they were coming off a relatively low base, he says. Instead, the S&P 500 returned about 13% a year.

Going forward, many like Nick think it would be foolhardy to expect U.S. equities to keep “doing the heavy lifting.” Models based on historical returns would signal investors could expect about 5% a year with dividends reinvested, he says. Sophisticated clients of financial advisors may understand this intuitively, but they’ve also grown inured to hearing the finest investment minds tell them to lower expectations for the last five years.

It’s also worth recalling that 2018 ended with many market participants anticipating a recession fueled by burgeoning corporate debt. Conventional wisdom turned out to be wrong as 2019 rolled into December looking like the fourth year of returns exceeding 20% since 2009.

Earnings are expected to rise in 2020, but some, including Commonwealth Financial Network Chief Investment Officer Brad McMillan, believe price-to-earnings multiples will drift down. He sees the S&P 500 finishing the year with single-digit gains as it vacillates in between 2,900 and 3,200.

Presidential election years typically are positive for the economy and equities, except in recessionary years like 2000 and 2008. As 2019 ended, fears of a downturn were receding.

What is more of a mathematical certainty is that bonds—at current interest rate levels—can’t produce the same kind of results they have for the last decade or four decades. Demographics are likely to keep interest rates low for the indefinite future, McMillan says. Low Treasury bond yields also can produce a floor for equities.

Sea Change At The Fed?
Some observers believe a sea change in Fed policy occurred in virtual obscurity earlier last year. For most of the last decade, central banks tried every trick they could to stimulate their local economies and rekindle inflation—without much success. “Every time they’ve cut rates, it hasn’t caused inflation and it hasn’t stimulated the economy,” says Margie Patel, manager of the Wells Fargo Diversified Capital Builder Fund.

Then in 2018, the Fed raised interest rates four times in response to what proved to be a short-lived bounce from a big corporate tax cut. In the process, the central bank caused a stock market collapse accompanied by widespread recession fears, so it cut rates three times in 2019, ending up almost where it started. And for what?

Patel believes Fed Chairman Jay Powell may have learned a lesson. In her view, the U.S. central bank has “fundamentally changed the game plan” it followed since the 1951 Fed-Treasury accord, an agreement that re-established the central bank’s independence after it had maintained artificially low rates during World War II. For the last 70 years, the Fed viewed its mandate as “spiking” the punch bowl when the economy turned soft and watering it down when the party got out of hand.

As Patel sees it, the notion of a cyclical economy has evolved. Business cycles haven’t been repealed, but there have been only three recessions since 1982—in contrast to seven in the 30 years before then. When she is frequently asked by advisors what inning the current economic expansion is in, her response is that “we aren’t in a game with innings” anymore.

She also sees reasons for optimism, particularly if the Fed, whose policy has dominated the last decade, does as little as possible. “It’s the bears’ worst nightmare,” she observes. “No one is talking about surprises on the upside.”

Well, almost nobody. One year ago Phil Orlando, chief equity market strategist at Federated Investors, predicted the S&P 500 would end 2019 at 3,100. As of mid-December, his bullish call looks like it may turn out to be an underestimate. For 2020, Federated sees GDP rising 2.4%, significantly higher than the Wall Street consensus of 1.8%.

Growth Drivers For 2020
Three developments could drive growth higher in this year’s first half—the end of the General Motors strike; the potential resolution of Boeing’s problems with its 737 MAX jet; and even a skinny, Phase One trade deal with China. “Stronger export volume could drive GDP,” Orlando says. “The Street thinks manufacturing is on a glide path to recession. We don’t.”

Virtually all foreign markets possess more attractive valuations than the U.S. Orlando admits he isn’t sure how trade negotiations with China will play out, but things aren’t likely to get much worse. A Phase One skinny deal with China could boost emerging markets, and any sort of Brexit deal would have a positive impact on Europe.

The S&P 500 hitting 3,500 in 2020 isn’t the only surprise Orlando sees. Big changes on the geopolitical scene could intensify and dramatically impact global investors, though events have still to unfold.

Advisors and their clients can’t have escaped noticing that protests have erupted everywhere from Chile to Paris to Beirut to Hong Kong. Orlando believes that China’s President-for-Life Xi Jinping is “painting himself into a corner.” He adds that his boss, Federated’s Chief Investment Officer Stephen Auth, thinks that President Trump might last longer in office than Xi Jinping.

Chuck Clough, chief investment officer of Clough Capital, didn’t put a time frame on Xi’s tenure as China’s leader, but the award-winning ex-Merrill Lynch chief market strategist voiced similar doubts when he spoke at Financial Advisor’s Inside Alternatives & Asset Allocation conference in Philadelphia last fall about whether Xi would remain in office for the rest of his life.

With 400 million aspirational millennials, many observers see China as the new frontier for consumer goods. Yet its financial markets have struggled under the weight of debt and the trade war.

Getting an accurate read on what is happening in China is difficult. Who really knows? Sales there by non-Chinese companies provide some indication. If one wants to know how the affluent are doing in China, sales of Johnnie Walker’s premium scotch brands or luxury cosmetics brands offer some signals.

Some fear that China will grow old before it grows rich, thanks to the now-reversed one-child policy. Whatever happens in the next decade, its past growth rates are unsustainable. “China is on an irreversible, declining growth path,” and that will have a significant impact on global GDP growth, Patel says.

Beyond 2020
If China isn’t going to power global growth for the next 10 years, it’s hard to see who will. Other emerging markets boast superior rates of GDP expansion, but most are resource-based and many commodities like oil are declining in their importance to the global economy.

“The biggest question the markets are trying to answer is whether this is near the end of a 10-year growth cycle or whether there is another leg up,” observes Michael Cuggino, CEO and chief investment officer of Permanent Portfolio Funds.

Consumers are working and spending, and their balance sheets are in relatively strong shape; while business spending has been soft, it could pick up in the first quarter. Inflation is in check, global interest rates have moved off their lows, and GDP is growing, albeit at a slower pace than many would like. “You don’t see a recession start with that kind of fact pattern,” Cuggino says. “We haven’t seen enough dominoes fall. We’ve entered a period where the Fed isn’t going to move in one direction or the other because the data isn’t compelling.”

James McCann, senior global economist at Aberdeen Standard Investments, expects there will be weak but sustainable growth in America and many other countries for much of the next decade.

As 2019 ended, the consensus was that the U.S. and many other countries could dodge a recession in 2020. It’s a state McCann describes as “stabilization of subpar growth rates.” Germany, a manufacturing-export colossus, suffered last year, but “just managed to avoid a recession.”

Looking at factors like demographics and GDP growth, Americans might find reason to feel their economy is superior to other developed regions like Europe and Japan. In many ways it is. The U.S. dominates key 21st century industries, most notably technology.

But America’s ability over the last two decades to run huge federal budget deficits isn’t permanently guaranteed. At the current rate, the Congressional Budget Office predicts, these deficits will exceed $1 trillion starting in 2022 and run at those levels for the remainder of the decade.

In contrast, the eurozone is barely running a deficit and its largest economy, Germany, has a surplus. The government of Greece, seen as insolvent early in the last decade, is now able to sell 10-year government bonds at practically the same rate as the U.S. Treasury.

DoubleLine CEO Jeffrey Gundlach has predicted America’s federal budget could hit $2 trillion or more in the next recession and wondered who will buy all these bonds. If the U.S. dollar heads south, yield-starved foreign buyers might become sellers.

If the new decade begins with advisors and clients feeling a lot more optimistic than they did 10 years ago, they shouldn’t get too comfortable.