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Market Outlook

Comfortable With the Uncomfortable

David R. Giroux, Chief Investment Officer, Equity and Multi‑Asset
Justin Thomson, Chief Investment Officer, Equity
Mark J. Vaselkiv, Chief Investment Officer, Fixed Income

The "reflation trade" appears real, but risks are still elevated.

Key Insights

  • Although the 2020 outlook remains guarded, monetary accommodation by key central banks appears to have put the global economy on a reflationary course.
  • Low or negative yields pose duration risks for sovereign bonds. Potential opportunities can still be found in corporate bonds and other credit sectors.
  • We expect technology to continue to disrupt global sectors. For example, falling renewable energy costs have been turning many utilities into earnings growers.
  • Geopolitical events, including the U.S. presidential election, the trade war, Brexit, and Hong Kong unrest, could be triggers for market volatility in 2020.

Heading into 2020, T. Rowe Price investment leaders believe global capital markets should be supported by continued economic growth and low but stable inflation rates. However, they also caution that a number of risks could trigger market volatility, including political uncertainties, slow earnings growth, and potential valuation excesses.

Investors will need to be “comfortable with the uncomfortable” to take advantage of potentially attractive opportunities, says Justin Thomson, chief investment officer (CIO), equity.

David Giroux, CIO, equity and multi‑asset, thinks much will depend on whether the economic reacceleration that equity markets appear to expect in 2020 actually happens.

In a time of widespread disruption, careful stock selection backed by fundamental research will remain critical, Giroux adds.
Following a stellar 2019, debt markets could prove more challenging going forward, according to Mark Vaselkiv, CIO, fixed income. Even a modest backup in yields in 2020 could significantly erode returns.

In a low‑ or even negative‑yield environment, Vaselkiv says, “we think the right blend of bank loans, high yield bonds, and emerging markets [EM] corporate bonds still makes sense.”

While economic headwinds were strongest in non‑U.S. markets in 2019, signs of stabilization are visible there as well, according to Thomson. EM equities appear to be best positioned to benefit from global reflation, Thomson adds. “Emerging markets are a cyclical asset class and should do better in that environment.”


Consensus expectations for 2020 earnings growth for the S&P 500 Index, as of late November 2019.

Challenges to Global Growth

Renewed efforts by the U.S. Federal Reserve (Fed) and other key central banks to support the global economy with monetary easing appeared to be working as 2019 drew toward a close, potentially setting the stage for a reacceleration in economic growth in 2020.

“I think we now have a reasonable understanding that growth and inflation expectations are bottoming,” Thomson says. Some of the signs:

  • As of late November, manufacturing and export indicators appeared to be stabilizing.
  • Copper prices—traditionally a key signal of global industrial activity—also rebounded.
  • The U.S. Treasury yield curve, which briefly inverted across the 2‑ to 10‑year segment in August, returned to a positive slope.

These signals do not mean the global economy is entirely on solid footing, Vaselkiv warns. A major political or financial shock potentially could trigger a renewed downturn. “We may be at an inflection point, where some sort of catalyst or crisis could tip the world economy into recession.”

U.S. Economy

As of late 2019, the U.S. economy remained in an expansion, largely sustained by consumer spending. But the slowdown in capital spending had put the brakes on earnings momentum, with 2019 per‑share earnings growth for companies in the S&P 500 Index expected to fall into the low single digits.

As of late November, forward‑looking multiples for the S&P 500 appeared somewhat high, although not exceptionally extended in historical terms, Giroux says. However, those valuations were predicated on consensus estimates of 10% earnings growth in 2020. That might be overly optimistic, Giroux cautions.

If an economic reacceleration doesn’t materialize, or isn’t strong enough to produce the expected earnings gains, “I think equity markets have a lot of room for the downside,” Giroux warns.


European economic and earnings growth were weak in 2019, as the slowdown in global trade hurt Germany’s export‑dependent manufacturing sector. Although European economies started to see “green shoots” of recovery late in the year, longer‑term factors—such as declining populations and weak productivity—could limit growth to 1% in 2020, Vaselkiv says, citing recent forecasts from the International Monetary Fund.

The European equity outlook also will depend on earnings in Europe’s financials sector, which has a heavy weight in regional indexes. But low interest rates and flat or inverted yield curves are major obstacles. “We need to see banks be able to start making positive spreads on new lending,” Thomson says.

Global Trade and Manufacturing Appear to Be Stabilizing
(Fig. 1) World Exports1 and Global Manufacturing Purchasing Managers’ Indexes (PMIs)2
Through September 30, 2019

Sources: J.P. Morgan Chase/Haver Analytics (see Additional Disclosure), and T. Rowe Price.
1 Includes the U.S., China, South Korea, Japan, European Union, Canada, and Mexico.
2 PMI readings below and above 50 typically indicate contraction or expansion, respectively.


Japanese equities—like Japan’s economy—remain vulnerable to the global economic cycle. As a result, Japanese equities lagged other major developed markets in early 2019.

However, by the same token, Japanese equities have benefited disproportionately from an improved global outlook. Whether that relative trend persists in 2020 will depend on a continued global reflation, Thomson says.


China’s growth slowed sharply in 2019, and is likely to continue decelerating in 2020, Vaselkiv says. This slowdown is only partially due to the trade war. High debt levels and declining demographics also have imposed structural constraints.

Chinese policymakers appear less inclined than in past slowdowns to stimulate credit and spending, as curbing debt growth among highly leveraged financial institutions appears to be a higher priority.

On the positive side, China’s consumer market continues to expand, driven by real (after‑inflation) gains in wages and household disposable income, Thomson notes.

Opening Quote On a cyclically adjusted basis, relative price/earnings ratios favor non‑U.S. equities by the widest margin since at least 1995. Closing Quote
Emerging Markets

Like Japan, the EM economies as a group are highly leveraged to the global economy. This led to volatile equity returns in 2019.

With currency values adjusted on a purchasing power parity basis, EM equities appear inexpensively priced, particularly compared with the U.S. market, Thomson says. Currency effects could add to their appeal if the dollar weakens in 2020.

Attractive valuations and potential currency gains also could benefit developed non‑U.S. equities in 2020, Thomson adds. On a cyclically adjusted basis, relative price/earnings ratios favor non‑U.S. equities by the widest margin since at least 1995.

U.S. Equity Valuations Appear High Relative to Rest of World
(Fig. 2) Cyclically Adjusted Price/Earnings Ratios (CAPE)
Through September 30, 2019

Sources: MSCI (see Additional Disclosures) and Citigroup. Copyright Citigroup 2005–2019. All Rights Reserved.


Central bank rate hikes in 2019 through September, down from 83 in 2018.

Central Banks and the Search for Yield

Global Central Banks Have Returned to Accommodation
(Fig. 3) Monetary Policy Actions1
Through September 30, 2019

Sources: International Monetary Fund and; data analysis by T. Rowe Price.
1 Total number of rate cuts and rate hikes made by central banks globally. For a full list of the central banks or monetary authorities included in the survey, please see Bank for International Settlements, Central Bank Hub, on the web at:

Alarmed by spreading signs of global economic weakness, key central banks changed direction in 2019, cutting interest rates and reviving or expanding quantitative easing programs.

The policy shift has been both widespread and dramatic, Vaselkiv notes. While 2018 saw approximately two interest rate increases globally for every cut, that trend flipped in 2019, with 91 rate cuts worldwide but only 16 rate hikes.

“Clearly, central banks have been making a synchronized effort to expand liquidity to support the global economy,” Vaselkiv says.

Vaselkiv does not expect the Fed to cut rates further in the closing weeks of 2019 and says it probably will not cut them in 2020. However, he predicts that global monetary policy will remain supportive as the European Central Bank and the Bank of Japan continue their quantitative easing programs.

A World Gone Negative

For bond investors, the shift to monetary accommodation in 2019 produced an unanticipated windfall, with virtually all global fixed income sectors delivering strongly positive returns.

  • Yields dipped into negative territory across a wide spectrum of sovereign issues, producing sizable capital gains at the long end of the yield curve.
  • Corporate bonds—both investment grade and high yield—delivered double‑digit returns in 2019, as investors reached to lock in yields before they declined further.
  • EM debt markets, including EM corporates, also performed well despite a stronger U.S. dollar, as easing inflationary pressures gave some EM central banks room to cut interest rates.

While the pool of negative‑yielding debt shrank somewhat as bond markets recovered from a late‑summer flight to quality, it still accounted for over USD 13 trillion in bonds outstanding—24% of total global market value—as of the end of October 2019.

Comfortable With the Uncomfortable

Additional Disclosures

Information has been obtained from sources believed to be reliable but J.P. Morgan does not warrant its completeness or accuracy. The index is used with permission. The Index may not be copied, used, or distributed without J.P. Morgan’s prior written approval. Copyright © 2019, J.P. Morgan Chase & Co. All rights reserved.

Copyright 2019 FactSet. All Rights Reserved.

MSCI and its affiliates and third-party sources and providers (collectively, “MSCI”) makes no express or implied warranties or representations and shall have no liability whatsoever with respect to any MSCI data contained herein. The MSCI data may not be further redistributed or used as a basis for other indices or any securities or financial products. This report is not approved, reviewed, or produced by MSCI. Historical MSCI data and analysis should not be taken as an indication or guarantee of any future performance analysis, forecast or prediction. None of the MSCI data is intended to constitute investment advice or a recommendation to make (or refrain from making) any kind of investment decision and may not be relied on as such.

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