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A Reason for Optimism in 2020: Tailwind From Lower Rates Begins to Blow

January 2020 
By Nanette Abuhoff Jacobson

Leading economic indicators point to rebounds in many developed markets, and in particular, recent interest-rate reductions should have a positive economic impact—and, therefore, market impact.

Managing Director and Multi-Asset Strategist at Wellington Management Company LLP and Global Investment Strategist for Hartford Funds.

Having closed the books on a great year for risk assets1 in 2019, I think investors can still expect solid returns in 2020. In fact, my investment recommendations have turned more bullish for a host of reasons:

  • Some tail risks have abated as Brexit fears fade and the US-China trade war eases. 
  • Investment flow data show that investors remain heavily weighted in cash and fixed income. This money could potentially return to equities amid an improving backdrop.
  • The global economy could accelerate.

That last point could be the most important reason to be bullish in the new year. I am more positive on the global economy because leading economic indicators point to rebounds in many developed markets. In particular, recent interest-rate reductions should have a positive economic impact—and, therefore, market impact. It usually takes about a year and a half for rate declines to lift economies by incentivizing businesses and consumers to borrow more cheaply in order to invest and spend. Europe is a good example. As Figure 1 shows, historically, declines in government rates (light blue line, inverted) have helped lift the manufacturing purchasing managers’ index (PMI),2 typically a good measurement of economic performance. I expect a similar pattern to follow this time around.


Figure 1

Past interest-rate declines should help economies in 2020

Eurozone manufacturing PMI and German bund 10-year yield


Past performance does not guarantee future results. | Sources: Bloomberg, Wellington Management | Chart data: December 1998–November 2019. Eurozone manufacturing PMI data is lagged 18 months and is from June 2000 to November 2019. German bund 10-year yield data is from December 1998–October 2019. PMI data is from January 1998–October 2019.


Investment Implications


  • I suggest favoring equities over bonds, since a stronger global economy should be conducive to risk asset outperformance. 
  • Consider increasing allocations to European and US equities. These two regions have seen the steepest interest-rate declines.
  • Don’t abandon bonds altogether, as they still play an important portfolio diversification role.


1 Risk assets (such as equities, commodities, high-yield bonds, real estate, and currencies) have a significant degree of price volatility.
2 Purchasing Managers’ Index (PMI) is an indicator of the economic health of the manufacturing sector. A reading above 50 signals economic expansion; below 50 signals contraction.

Important Risks: Investing involves risk, including the possible loss of principal. • Foreign investments may be more volatile and less liquid than US investments and are subject to the risk of currency fluctuations and adverse political and economic developments. • Fixed income security risks include credit, liquidity, call, duration, and interest-rate risk. As interest rates rise, bond prices generally fall. • Diversification does not ensure a profit or protect against a loss in a declining market.

Mutual funds are distributed by Hartford Funds Distributors, LLC (HFD), Member FINRA. Certain funds are sub-advised by Wellington Management Company LLP. HFD is not affiliated with any fund subadviser.

The views expressed here are those of Nanette Abuhoff Jacobson. They should not be construed as investment advice. They are based on available information and are subject to change without notice. Portfolio positioning is at the discretion of the individual portfolio management teams; individual portfolio management teams, and different fund sub-advisers may hold different views and may make different investment decisions for different clients or portfolios. This material and/or its contents are current as of the time of writing and may not be reproduced or distributed in whole or in part, for any purpose, without the express written consent of Wellington Management or Hartford Funds. 

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