LPL Investment Chief: Trade Conflict Could Slow Business Into 2020

Aug. 20--For two years, LPL Financial has preached that business investment is key to sustaining the current economic expansion, the second-longest in modern U.S. history.

But lingering headwinds from the U.S. trade conflict with China have dampened capital spending from companies over the past several quarter, leaving consumers and the possibility of interest rate cuts from the Federal Reserve to carry the load.

As a result, LPL Financial on Monday tweaked its economic forecast for the rest 2019, lowering its prediction for U.S. GDP growth.

"We don't think things are going to get better in the short term on trade, and businesses continue to hold back on the capital investment that is so important, particularly in the 10th year of the economic cycle," said John Lynch, LPL's chief investment strategist, in an interview in San Diego.

LPL's new forecast predicts 2 percent GDP growth, which is "still a good number. It is still the trend for the past decade," said Lynch.

But it's lower than the 2.25 percent to 2.5 percent growth that LPL predicted earlier.

Lynch was in San Diego for LPL's Focus 2019 conference at the Convention Center, which draws about 4,000 financial advisors from around the country.

LPL is a top retail investment advisory firm and the nation's largest independent broker-dealer. It provides technology, research, compliance, practice management and clearing services to independent financial advisors.

The firm is celebrating its 30th anniversary this year. It has deep roots in San Diego. The company was formed in 1989 when Boston brokerage firm Linsco bought San Diego's financial adviser Private Ledger -- hence the LPL name. San Diego remains among its largest locations, with roughly half of its operations based here.

While LPL believes the U.S. and China will continue trade talks, it thinks the dispute could drag into 2020.

Lynch expects a deal to get done by the first quarter of next year. "Both leaders are under the gun," he said. "President Xi is under pressure. Their economy is weakening. There's Hong Kong. And our president obviously has an election coming up."

This year, investors have become increasingly jittery amid fears of slowing global economic growth and trade worries.

Last week, the Dow Jones Industrial average plunged 800 points after a closely watched data point that has predicted past recessions -- the inverted yield curve -- began flashing warning lights for the first time in this economic cycle.

LPL believes outside factors are at play that led to the inverted yield curve, including central banks globally lowering their own interest rates to the point where investors are fleeing to U.S. bonds.

The U.S. economy is still resilient, with low unemployment and reasonable wage gains and few signs of excess in the financial system. So Lynch does not believe the yield curve is a sign that a recession is imminent.

Other factors, however, could emerge to spark a downturn, he said.

"We are going to have a recession someday. We always do," said Lynch. "The culprit could be the elections in as much as I think on both sides, the acrimony is going to be so high that businesses and consumers conceivably could just say, I'm out. They stop spending. They stop investing. It is a self-fulfilling prophecy recession."

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