The Week Ahead – Auld Lang Syne

Welcome to “The Week Ahead” where we take a moment to provide our thoughts on what we can expect in markets and the economy during the upcoming week.

Should auld acquaintance be forgot,
and never brought to mind?
Should auld acquaintance be forgot,
and auld lang syne?

This week we will witness the turning of not just another year, but another decade. The first calendar decade without a bear market (generally regarded as a 20% drawdown in the broad equity market index). It is a tradition in many parts of the world to sing the Scottish hymn “Auld Lang Syne” to bid farewell to the old year at the stroke of midnight on New Year's Eve. By extension, it is also sung at funerals, graduations, and as a farewell or ending to other occasions. The poem's Scots title may be translated into English as old long since or, more idiomatically, long long ago. Consequently, "For auld lang syne", as it appears in the first line of the chorus, might be loosely translated as "for the sake of old times".

As we bid farewell to 2019, should we forget the old acquaintance of above trend returns from financial assets, or should we assume past is prologue? It is a difficult question since we know past performance may not be indicative of future results, but in terms of the economy, many of the powerful economically simulative forces put in place by the Federal Reserve (Fed) in the form of interest rate cuts operate with a 12-18 month lag. This means the cuts we saw in July, September, and October have yet to be fully appreciated. Of course markets are a discounting mechanism and have arguably already priced in these global efforts to add massive amounts of liquidity to the global economy; much of which ends up finding its way into financial assets. Of course, these interest rate cuts, called a “mid-cycle adjustment” by the Fed, are an effort to counter slowing economic growth and help boost flagging inflation.

With most economic data showing strong momentum lately, we will be most interested in the Purchasing Managers Index (PMI), which is an index of the prevailing direction of economic trends in the manufacturing and service sectors. This important indicator fell into contraction territory in June and hasn’t seen much strength since. With many other economic indicators moving up, and with a record setting retail shopping season, we should expect the PMI to move back into expansion (anything above 50).

As we bid farewell to our old acquaintance, the 2009–2019 bull market (+189%*), we should look forward to the 2020s with our eyes unflinchingly on the road ahead rather than focused on the rear-view mirror. With inflation low enough to allow central banks around the world to maintain historically low interest rates, there is a good chance economic growth and prosperity will not only continue, but actually surprise to the upside.

Happy New Year everyone!

Data deck for December 30–January 3:

*estimate as of the time of writing