7 Economic Questions, Answered by BofA Analysts

Uncertainty around the U.S.-China trade relationship is a big one, says Joseph Quinlan, head of chief investment office market strategy. As is the technology cold war emerging between the U.S. and China around which systems will be used and whether countries will be forced to choose one over the other.

Brexit is still on people's minds, with uncertainty extended by additional factors such as the British government's inability to reach a deal with the European Union in 2019. Still, much of that has already been priced into financial assets. Also, there is always the risk of unexpected events in places like the Middle East.

But the greatest geopolitical risk for U.S. investors, according to Quinlan, is the November presidential election. It's important, he and his colleagues believe, to stay focused on the issues that matter to growth: policy, fiscal expansion, monetary easing, earnings growth and secular long-term themes, including demographic trends like global aging and longevity.

He suggests that geopolitical risks could even create opportunities for investors who can tune out noise and keep their nerves steady.

5. What's the outlook for emerging market economies in 2020?

Given China's significant weighting within emerging markets, the trade conflict with the U.S. will be the key risk factor, says Ehiwario Efeyini, senior market strategy analyst in the chief investment office. He notes that the frictions are not only about trade and investment, but also about China's rise as a global power in areas like artificial intelligence, semiconductor design and electric vehicles — while its economy, though decelerating, is still growing in size.

In the meantime, some exporters in industries such as consumer electronics and textiles are moving production away from China into other parts of Asia, which may benefit other emerging markets, including Indonesia, Thailand, Malaysia and Vietnam.

Elsewhere, Efeyini says, economic and political turmoil in the Middle East poses risks to individual countries, but should not have a big effect in aggregate as the region accounts for just a small share of the emerging market index. Unrest has boiled over in Latin America as well, but crucially not in Brazil and Mexico, which together account for some 90% of regional market cap.

The Brookings Institution projects that another 2 billion middle-class consumers will be added to the emerging world over the next decade, which could mean that sectors will matter more than geography when it comes to future returns. Areas such as consumer discretionary, health care and technology are tied to the long-term rise of the emerging market consumer class, and Efeyini doesn't see this trend changing, even with the trade concerns.

In addition, he says, emerging market valuations look relatively cheap compared to past levels, which suggests outperformance over the longer term.

6. The Federal Reserve switched course over the past year from a policy of raising interest rates to one of lowering them. Could the Fed continue on this path in 2020 — and how could that affect savers and borrowers? 

Matthew Diczok, fixed income strategist in the chief investment office, points out that the Federal Reserve has said repeatedly that its goal is to continue the long economic expansion, and that was its motivation for beginning to cut rates in July. The economy appears to be responding. The rate-sensitive housing and autos sectors are beginning to rebound. The Fed has signaled that, absent a significant increase in inflation, it is unlikely to raise rates. Any change in short-term policy rates will likely be a reduction, Diczok says.

He and his colleagues think investors should worry less about what the Fed may do meeting by meeting, and remember that its current goal is to keep the economic expansion going, which is generally helpful for the stock market and for investor portfolios overall.

That said, he acknowledges that the lower rate environment continues to be very hard on savers and on anyone looking for income, a situation that is unlikely to change significantly in 2020.

The team recommends investing with a combination of short-, medium- and long-term bonds. The shorter-dated bonds let you reinvest at higher rates if yields rise, while the longer-term ones will increase more in price if yields decline. Diczok says that even at what seem like low yields, it makes sense to put money to work sooner rather than later and let compounding do the work.

7. Despite the continued strength in the U.S. economy, there are worries a recession could be ahead. What are the signs to watch for in 2020 that growth will remain on track?

Going into 2020, Jonathan Kozy, senior macro strategist in the chief investment office, and his colleagues expect growth to slow to around 1.7% on an annual basis — below 2019 growth, and slower than the 2.3% average during this 10-plus year expansion.

Uncertainty from the trade war and U.S. elections in November will continue to weigh on business investment and certain other parts of the economy, Kozy says. Still, recessions are common in the first year of the presidential cycle, when big shifts in policy trends may take place. During the current administration, deregulation and tax cuts occurred, and a reversal of those trends could weigh on future growth.

The Fed has played a big role in keeping the current expansion going, although it raised interest rates faster than the economy could handle before reversing course. Kozy says another policy misstep by the Fed could increase the chance of a recession if, say, it were to raise rates or, alternatively, fail to get inflation near or above its 2% target.

On the other hand, consumers account for 70% of the economy and are currently in a good place, thanks to a strong labor market, good wage growth and low mortgage rates. This is a key pillar of growth for the U.S. economy, Kozy notes. He points out that home prices have risen, and in the third quarter, residential real estate investment made its first contribution to GDP since 2017. With homebuilder confidence fairly high, a positive contribution from housing in 2020 is likely.

Kozy says it would be concerning if consumers became overly exuberant and excessively inflated asset prices or began to take on too much debt. However, the aggregate balance sheet and financial obligations data indicate that the U.S. consumer is still very healthy — a good indicator that growth can continue.