SUMMARY

  • We believe the global economy is about to enter a low-growth “window of weakness,” a period we expect to persist into 2020.
  • In our baseline forecast, the low-growth period of vulnerability over the next several quarters gives way to a moderate recovery in U.S. and global growth in the course of 2020.
  • However, our conviction in this baseline economic narrative is lower than usual, given the environment of elevated political uncertainty and fat left and right tail risks.
  • During this window of weakness, we think it prudent to focus on capital preservation, to be relatively light in taking top-down macro risk in portfolios, to be cautious on corporate credit and equities, to wait for more clarity, and to take advantage of opportunities as they present themselves.

In the four months since our annual Secular Forum, investors have been busy “Dealing With Disruption” (Secular Outlook, May 2019) – such as the escalating trade war between the U.S. and China, changes in government in the U.K. and Italy, the U.S. president criticizing the Federal Reserve, and the vertiginous plunge in bond yields in August.

Against this backdrop of political and market volatility, PIMCO’s investment professionals and advisors convened in Newport Beach in mid-September for our Cyclical Forum to reassess the macro outlook and our positioning for the next six to 12 months.

In a nutshell, we concluded that the global economy is about to enter a low-growth “window of weakness,” which we expect to persist going into 2020 with heightened uncertainty about whether it is a window to recovery or recession. During this window, we think it prudent to focus on capital preservation, to be relatively light in taking top-down macro risk in portfolios, to be cautious on corporate credit and equities, to wait for more clarity, and to take advantage of opportunities as they present themselves.

SLOWING TO STALL SPEED

In our baseline scenario, we expect global GDP growth to slow further over the next several quarters as ongoing trade tensions and heightened political uncertainty in multiple jurisdictions continue to act as a drag on global trade, manufacturing activity, and business investment.

While labor markets have remained firm and consumer spending relatively solid in most advanced economies, we see the slump in global trade and manufacturing increasingly affecting other economic sectors via sagging corporate profits, reduced hiring, and a pullback in business investment. We expect U.S. GDP growth to slow to a meager 1% or so in the first half of 2020, down significantly from 3% in the first quarter and 2% in the second quarter of 2019. This would further corroborate our thesis that U.S. economic growth will be “Synching Lower” (Cyclical Outlook, December 2018) toward the rest of the world over the course of this year.