Reviewing its outlook for 2020, the investment team at New York fund manager Neuberger Berman recently discussed the economic risks associated with “fiscal dysfunction” – the government’s inability to create regulatory, spending and tax policies optimized for the current economic environment.
Joseph V. Amato, the firm’s chief investment officer for equities, said he’s ultimately optimistic for stocks in the coming year, but uncertainty around the presidential election and persistent fiscal dysfunction could create substantial volatility:
“We’ve all seen the data showing that a recession has been much more likely in the 12 months following a U.S. presidential election than it has been in a typical year. That correlation must reflect the business uncertainty around tax and regulation that an election throws up: investment gets delayed, which shows up as lower growth 12 months later. It just adds more to what I would call a general sense of ‘fiscal dysfunction.’ Central banks are being forced into increasingly extreme policy because governments are generally not getting things done and specifically not making the fiscal decisions appropriate to the current environment.”
Uncertainty could produce a 10% correction in 2020, Amato said, though it would likely be short-lived. Erik L. Knutzen, the firm’s chief investment officer for multi-asset class, added that markets may have to wait a year to see if fiscal policymakers are capable of responding to a slowdown. “We may have to wait until 2021 or beyond for that, which could leave us caught in a void between monetary stimulus and fiscal stimulus during 2020.”