Welcome to 2020!
Markets and the economy had a great year in 2019, with record gains for most of the major indexes, including the Dow, S&P 500, and the tech-heavy Nasdaq.
Now it’s on to a new decade, and to start the year out the right way, Stash is offering its perspective on some things to look out for in 2020 as you plan the most important parts of your financial life, which should include creating a budget, saving for emergencies and creating a financial plan for retirement. (Find out more here.)
Here’s wishing you a great new year, and a wonderful new decade!
In fact, in December the U.S. economy added 266,000 jobs, beating economist expectations by nearly 90,000 jobs.
Takeaway: No matter how you look at it, when U.S. consumers have jobs, it’s great for the economy. But higher employment rates means it’s more expensive to hire workers, which can drive wages up, as workers demand more, and can make it more expensive for businesses to take on new workers. As a result, businesses can pass along the cost increases to consumers, which can lead to inflation.
Consumer sentiment and spending
Consumer sentiment—which essentially means how people feel about their economic prospects and their willingness to spend—was strong toward the end of 2019. That’s according to something called the Consumer sentiment index, put out by the University of Michigan. Its most recent survey shows general confidence in the economy, for factors including employment, inflation, and the strength of household finances.
Consumer spending, which makes up nearly 70% of the economy, was particularly strong on the two mega-shopping days following Thanksgiving. Shoppers spent $7.4 billion online on Black Friday, a nearly 20% increase compared to their Black Friday spending in 2018, according to Adobe Analytics. (They spent an additional $4 billion on Thanksgiving day itself, according to Reuters.) Even so, according to Adobe, it was Cyber Monday that emerged as the real winner for one-day sales, with online shoppers ringing up $9.4 billion in purchases, an almost 20% increase compared to 2018 when shoppers spent $7.9 billion.
Takeaway: Upbeat consumers who continue spending are generally a good sign for the economy. But consumer sentiment can change quickly. In fact, two-thirds of consumers still believe a recession will occur in 2020.
The Federal Reserve lowered interest rates three times in 2019, providing stimulus to the economy that may begin to fade this year.
Here’s how it works. Interest rates are the underpinning of consumer borrowing—think credit cards, car loans, and mortgages. Lower interest rates can provide a stimulus to the economy through cheaper loans.
But the Federal Reserve has indicated it’s finished lowering interest rates for now, and the current rates—the Fed lowered its benchmark rate to between 1.5% and 1.75% in September—may remain where they are for a while. In fact, in its most recent meeting in December, the central bank left interest rates unchanged.
Takeaway: Lower interest rates helped to stimulate the economy in 2019, but it’s unclear if the Fed will continue to lower rates in 2020.
The trade war
The U.S. is engaged in a trade war with at least half-a-dozen other countries, including China, Argentina, Canada, France, Japan, and South Korea.
But it’s the trade war with China that has most economic experts worried, as it has the potential to reduce economic growth.
Not only are the U.S. and China the largest economies in the world, but the two countries also trade nearly half a trillion dollars worth of goods with one another.
While the U.S. has entered into a partial agreement with China to resolve tensions, since 2018, the United States and China have taken turns raising tariffs on each other’s exports, including steel, soybeans, whiskey, lumber, and electronics, among others. In May 2019, the United States doubled tariffs on $250 billion of Chinese products and China responded by announcing tariffs on $60 billion of American products.
Takeaway: Trade wars can provoke uncertainty not just in the U.S. economy but globally. The tariff war with China has already led to higher costs at home. In fact, with the current tariffs in place, American households will spend an extra $2,031 per year, according to the National Foundation for American Policy.
One worrying sign that’s been haunting the economy and economists since the summer of 2019 is the marked slowdown in manufacturing. In fact, November marked the fourth straight month that manufacturers reported a contraction in their activity, according to the Institute of Supply Chain Management, which tracks factory orders and output.
Takeaway: The trade war may be causing a drop in orders as American factories struggle to come to terms with global economic uncertainty. While manufacturing makes up only 11% of the U.S. economy, a slowdown in this sector could have a big impact on industries such as car manufacturing that make up a big chunk of economic activity, and on regions where manufacturing is an economic mainstay, according to reports.
Climate change is real. Look no further than the increasing power of hurricanes, floods, and wildfires in recent years to permanently change landscapes.
And it’s likely that the increasing natural disasters will also harm the economy.
Here are some key findings from the most recent National Climate Assessment study, from 2018.
- By 2050, the average annual temperature of the U.S. could increase by 2.3 degrees.
- The U.S. economy could shrink as much as 10% by the end of the century, losing hundreds of billions of dollars in national and overseas trade, not to mention health costs and disaster relief. Farming and other agriculture will be harmed, through the declining health of livestock, reduced crop yields, and threats to food security, among other things.
- Aging national infrastructure could be further harmed by extreme weather such as flooding, heatwaves, and wildfires, leading to threats to the economy, national security, and human health.
Takeaway: Expect extreme weather events and other natural disasters to continue affecting the U.S. economy, potentially causing billions in damages and lost revenue.
2020 is an election year. And while individual presidents come armed with economic policies, achieving those goals can depend on politics. For example, a divided Congress lost in legislative gridlock could be good for business, because there is very little chance that meaningful regulations will be passed unless both parties find some sort of common ground. On the other hand, a unified Congress might have a good chance of passing things like infrastructure reform, health care improvements, or tax changes.
Takeaway: Elections matter, and politics can affect the economy in unexpected ways, from the passage of new regulations, to lowering interest rates, and spending on infrastructure.
How you can prepare
Volatility and risk, or the potential for your investments to lose money, are always part of investing, especially in the short term.
But there are things you can do to help shield yourself from too much risk.
We recommend following the Stash Way, which includes regular investing, investing for the long term, and diversification.
You can also consider adding safer investments such as bonds to your portfolio. They’re often good long-term investments that could help smooth out fluctuations in your returns.
Another thing to think about, particularly if you’ve got small amounts of money to invest, is to ride out any downturn by sticking to a regular investing schedule, and investing over time. You’ll effectively be purchasing investments sometimes when stocks are low, and sometimes when they’re high. Over time, share prices should even out.