September 20, 2019

Key Takeaways

  • GDP and Interest Rates Have Fallen Over the Last 50 Years
  • People Living Longer is a Positive for Health Care Sector
  • Tech Revolution Supportive of Tech and Communication Services Sectors

I made it! I am fortunate to be celebrating my fiftieth birthday this week, joining Jennifer Lopez, Jennifer Aniston, Jack Black, Jay-Z, and Matthew McConaughey who were also born in 1969. As I reflect upon my life thus far, not only have I changed (just a little bit of gray hair!), but there have been demographic, economic and financial market modifications that need to be appreciated and applied to investment strategy.

  • Fifty is the New Forty | Back in 1969, the average life expectancy was ~70 years; today it is approaching ~79 years. The added years of life expectancy are a result of enhanced preventive and life sustaining medicines, two long-term reasons why we continue to like the Health Care sector. Other supportive factors include attractive valuations and strong growth prospects for the rest of 2019 and 2020. However, living longer is not without its drawbacks as the longer people ‘tap’ into social security and Medicare, the more fiscally challenged these programs will become.
  • Two is the New Four | In the late 1960s and early 1970s, US GDP growth in excess of 4.0% was not an anomaly and was considered a ‘healthy’ growth rate. Today, because of demographics and structural changes to the economy, 2% GDP is considered healthy as the economy grows above its potential (estimated to be +1.9%). Slower growth has been offset somewhat by the increased longevity of economic expansions as the current expansion is the longest (123 months) in US history. We forecast that the US economy will grow by 2.2% in 2019 and 1.7% in 2020. With a low probability of a recession over the next 12 months, risky assets such as equities should continue their ascent (S&P 500 2019 year-end target = 3,071).
  • One is the New Seven | The 10-year Treasury yield was ~7% when I was born and peaked around 15% as I became a teenager. However, after that, interest rates and my age have gone in completely opposite directions. Today, the 10-year Treasury yield struggles to shake the 1%-handle to the upside. Weak global growth, trillions of dollars of negative yielding debt, tepid inflation, and aging global demographics will keep interest rates lower for longer. In addition, as global debt from governments, businesses and consumers has increased to record levels, the global economy will have a tough time absorbing higher interest rates (as interest payments increase). Our 2019 year-end 10-year Treasury yield forecast is 1.60%. With rates remaining low and the yield curve relatively flat, we have a neutral view on the Financial sector.