2020 Capital Markets Forecast: Market Tug of War


Our 2020 forecast discusses the interplay of productivity, populism, and portfolios. 

  • We look at solving the productivity puzzle.
  • We discuss productivity driving populism.
  • Our forecast also looks at testing the limits of policy.

Investing is a data-driven process. We comb through economic and market information and use the data as clues that help lead us to a prudent investment strategy. With the scope of the investment universe so large, we rely on private industry and government data to give us the lay of the land. But what if the data are not telling the full story, or worse, are wrong? How do we proceed if we observe one thing to be true, but the data tell us something different?

Nowhere is such a phenomenon clearer than in productivity growth statistics. Government data since 2007 have indicated the slowest productivity growth of any economic expansion in the post-WWII era, well below the long-term average. Yet there is ample evidence of how technological progress is benefiting companies, individuals, and society. In last year’s forecast, we offered productivity as an explanation for the low level of inflation observed during this cycle and predicted productivity growth would pick up, and recent data suggest our call is starting to pan out. 

The first theme in our 2020 forecast expands on this, digging deeper into pieces of the productivity puzzle to help determine where productivity levels may be today and where its growth is headed. Why, you may ask, are we so focused on productivity, which some consider a “second-tier” data point that is released with an even greater time delay than gross domestic product (GDP) and covered only marginally by the media? We believe productivity is the most important driver of the economy, policy, and societal progress, as it allows the economy to produce more output with less labor. Economic growth is equal to productivity growth plus labor force growth, and higher productivity permits more robust economic growth and higher wages without generating inflation. 

At the same time, the wide productivity gains achieved thus far have come at marked social costs. The forces that have propelled productivity have not returned gains evenly across the wealth spectrum. Instead, the jobs market has become “hollowed out” as technology increasingly encroaches on roles in the center of the labor spectrum that have traditionally called for skilled workers. The result is less of the economic pie going to workers and increasing political and economic populism, which we discuss in our second theme. 

Our third theme weighs implications on markets of the dueling forces of productivity versus populism, as well as the current manifestations of this conflict between monetary policy and trade policy. This cycle is unique in numerous ways, and the fate of risk assets over the coming year will be a result of how these forces shake out. We share how we are thinking through the push and pull of policy risk over the coming year. We stand at a crossroads, preparing to close out one year and welcome another—with an election whose results are sure to have a sweeping impact on the economy and markets.

Please see important disclosures at the end of the article.

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Tony Roth


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