Economy

What to Expect as We Roll Into 2020

By Charles Sizemore  |  December 30, 2019

Well, this is it. My last Rich Investor article of 2019… of this decade, for that matter. And I don’t know about you, but this has been a good decade for me.

My second child was born, I bought a home, I learned how to ski, I celebrated my 10-year wedding anniversary, I started — and closed — a business or two, and, of course, I launched Peak Income.

Looking at the bigger picture, I don’t know how positively historians will remember this decade. Like 1930s Great Depression, the past ten years have been defined by the financial crisis that preceded it. We’re still dealing with the aftermath of the 2008 meltdown.

One result of the Great Recession that started in 2008 was the rise of extreme politics. Both parties have drifted far from the center. The Republicans have become trapped in a cult of personality around Donald Trump, and the Democrats are sliding into a socialist ideology that should have been discredited when the Soviet Union fell three decades ago. If you’re a pragmatic centrist, you really don’t have a party at this point.

Of course, extreme politics was made possible by two other phenomena of the 2010s: widespread adoption of smartphones and social media.

Sure, Facebook was founded in 2004 and Twitter in 2006; well before the 2010s. But they started as niche networks dominated by young people.

Today, the oblivious iPhone user ignoring their families at dinner is as likely to be a grey-headed grandmother as it is moody teenager.

This will probably be remembered as the decade the world became “Democratic” in the truest sense of the word.

Everyone has an opinion. No one is afraid to share it on social media.

We can’t really know ahead of time what the next decade will bring. Making bold predictions is usually a fool’s errand. But we still have portfolios to invest, and the performance of those portfolios will depend on how well our predictions meet reality.

So, today I’m going to make more predictions about the decade of the 20s.

Where Do Interest Rates Go from Here?

After keeping the Fed funds rate anchored at zero for nearly a decade, Chair Janet Yellen started raising rates in early 2016. Yellen, along with her successor Jerome Powell, kept pushing them higher for three years. Yellen and Powell made a real effort to normalize interest rates.

Unfortunately, they started too late and quit too early.

The Fed funds rate never got higher than 2.25%.

After the tech bust of 2000 and the recession that followed, the Greenspan Fed slashed rates all the way to 1%. But they didn’t stay there long. The Fed quickly started raising rates again and managed to push the Fed funds rate to 5.25% before the housing bust forced them to start easing again.

In the last tightening cycle, the Fed raised interest rates by a cumulative 4.25%.

This time around it was just 2.25%, and they’ve already put the hikes into reverse.

It’s not a stretch to see the Fed lower rates back to zero again. That was once taboo, but now that the taboo has been broken, why wouldn’t they? As things stand, we’re only 1.5% above zero anyway.

Will they follow the lead of the European Central Bank and push rates into negative territory?

If we get a recession, yes. I think it’s likely.

So, if you’re hoping for higher CD rates at the bank, don’t hold your breath. Our leaders have already proven willing and able to break all the rules of good governance. We should just assume this is yet another unspoken rule they’ll break.

But what about long-term bonds?

Income investors are a lot more likely to have their money in long-term bonds than in anything tied to the Fed funds rate.

Here, the story gets better… but not all that much better.

A Small Silver Lining

For the past decade, the 10-year Treasury has traded in a range of about 1.4% to 3.2%. We saw Treasury’s hit the bottom end of that range earlier this year before rallying a little. But even after a flood of positive economic data over the past several weeks, the 10-year yield remains stubbornly below 2%.

My view here really hasn’t changed much. It’s the same today as it was late last year, when yields were hitting multi-year highs. I think the most likely scenario is that yields continue to stay in their range of the past decade. Whenever yields start pushing above 3%, new yield-starved buyers should come out of the woodwork to gobble them up.

I just don’t see any way that U.S. yields can push too far above 3% when large swaths of the European bond market are in negative territory, or at least close to it. As I write this, the 10-year German bond yields -0.27%. No matter how rough things look here, buying a 10-year Treasury at a positive yield sounds a lot better than buying a German bond at a negative interest rate, guaranteeing a loss.

Over the next year, yields could push over 2.5% if the economy stays strong and we avoid a major recession. But I see the bigger picture here being simply that yields move sideways.

Of course, that’s no problem for my Peak Income readers. This is where we have a portfolio of stocks and funds yielding a minimum of 5% to 10%.

Charles Sizemore

Income and Retirement Strategist, Charles Sizemore, CFA specializes on dividend-focused portfolios and building alternative allocations by finding value opportunities outside of the mainstream stock market.

Charles is the executive editor and portfolio manager for Dent Research's premium newsletters, Peak Income and Peak Profits.

He is also a frequent guest on CNBC, Bloomberg TV, Fox Business News and Straight Talk Money Radio, and has been quoted in Barron’s Magazine, The Wall Street Journal, and The Washington Post. He is a frequent contributor to Forbes, GuruFocus, MarketWatch and InvestorPlace.com.

Charles holds a master’s degree in Finance and Accounting from the London School of Economics in the United Kingdom and a Bachelor of Business Administration in Finance with an International Emphasis from Texas Christian University in Fort Worth, Texas, where he graduated Magna Cum Laude and as a Phi Beta Kappa scholar. MORE FROM AUTHOR