What headwinds do stocks face going into 2020?

While public equities appear to be holding steady, at least for the moment, certain longer-term indicators could give institutional investors cause for concern.

“Growth is not at risk and inflation is nowhere to be found. And those two factors are likely to push central banks to become complacent,” says Florian Ielpo, head of macroeconomic research at Unigestion Asset Management (Canada) Inc.

Also for the moment, monetary policy is off the table. While this inaction isn’t exactly a headwind, he adds, central banks have proven so helpful to equity markets in recent years there’s a chance investors will feel the lack of that positive booster.

Read: Lessons in measuring carbon risk and opportunities in public equities

Instead, consumption will be driving growth and has been the main driver of the current cycle, says Ielpo. “Consumption is very likely to remain with us. And one very good reason is what’s likely to improve is durable goods consumption.”

Consumers have the advantage of cheap credit and will probably use it to buy longer-term goods, such as cars and appliances, while it remains easy for them to borrow to do so, he says.

At the same tine, borrowing has also been cheap for corporations. U.S. companies have taken on increasingly higher debt levels in recent years, but this leveraging has been largely offset by rising profits. Today, debt levels are starting to outpace profits, says Ielpo, but they aren’t close to worrisome heights yet.

Another major factor looking ahead is geopolitical risk, especially as it relates to trade relations between the U.S. and China. “If Donald Trump were to be re-elected, the trade war would reignite and that would be a major game-changer to our investment scenario.”

Read: Impact investing in public equities on the rise in Canada: report

The trade war plays into three fundamental concerns for institutional investors, he says: recession risk, inflation risk and market stress. Even with the limited trade actions and tariffs implemented so far, there are clear pressures on businesses that could be further exacerbated by trade tiffs. As well, tariffs have the potential to boost inflation in such a way that the Federal Reserve has no recourse to rein it in, notes Ielpo.

As for market sentiment in general, investors following the continual blow-by-blow playing out both on Twitter and at the negotiating table is boosting reactionary volatility in equity markets.

Looking ahead to the coming election, if the Democrats are able to take back the presidency, as well as control over both houses of Congress, it’s hard to see a scenario where the administration wouldn’t reverse the corporate tax breaks that President Trump prioritized, says Ielpo. Such a reversal would doubtlessly put pressure on U.S. equities, he adds.

Read: Institutional investor confidence lags even as equities recover: survey