New Year Outlook 2020

NEW YEAR MARKET & ECONOMIC OUTLOOK

2020 Outlook

It’s the last day of the year, and the decade.
Today, I want to wish you and yours a Happy New Year and hope all your resolutions are made.

For the stock market, 2019 was a great year,
So we all have a great reason for year-end cheer.

Looking ahead to 2020,
I hope the new year brings you plenty.

As I stop to reflect on the year gone bye,
I am reminded that time sure does fly.

While this year should leave investors feeling more wealthy,
I hope for the entire new year you are healthy!

Happy 2020!
John

We Wish You a Happy & Healthy New Year!
John & Laurie

Resiliency Amongst Uncertainty…

Looking ahead to next year, I have summed up 2020 thematically as a year of “Resiliency Amongst Uncertainty”. While the financial markets are uncertain by definition, robust earnings gains next year will support a resilient stock market.

With another year and another decade in the history books, 2020 has a tough act to follow. 2019 was a big surprise for the financial markets. The stock and bond markets did precisely what was least expected: they went up a lot. For the economy; another surprise. No recession. However, after 35 years of Wall Street experience, I’ve learned that 2019’s results shouldn’t be a total surprise. The market’s nature is to “climb the wall of worry”; doing what is least expected. Market action is often counter-intuitive and usually confounds consensus forecasts. To be fair, it is hard to fault analysts’ gloomy predictions for 2019. Just as they were undertaking their assessment of the stock market for the year ahead, the market was in a steep sell-off. December of 2018 was the worst December since 1931. In the midst of that steep fall it was difficult to foretell 2019 being the best year for stocks since 1997. By now you have likely read and heard many market pundits’ take on the worlds’ investment markets and economies for the new year. Looking ahead to next year, I have summed up 2020 thematically as a year of “Resiliency Amongst Uncertainty”.

The framework for my outlooks always begins with what I know, leads to what I think and finishes with what I will do. So, what are the “knowns”? For starters, we all know 2020 will bring with it myriad market-moving events, most obvious the 2020 presidential election and the next phases in U.S.-China trade relations. Also well-known is the age of the bull market, which is now the longest stock market run ever. In addition, the U.S. economy is in the longest economic expansion in history. It is known that interest rates were unexpectedly cut three times last year and the Fed has clearly telegraphed it has no plans to move on interest rates for now. With near “goldilocks” market backdrop conditions and a “TINA” mentality to stocks (There is No Alternative), market volatility has collapsed to a record low. The historical post-world War II average price-to-earnings ratio for the S&P 500 is 17.3. With the major index PE ratio now about 19.5 (based on trailing earnings of $163), we know the market is not “cheap”. What I also know is big gains for the stock market is often good news for the next. The S&P 500 has jumped 20% or more in a year 24 times in its history since 1928. In the years that followed those winning years, the index rose 66% of the time (with an average of 6.6%). Lastly on the stock market, next year bodes well for stocks as 2020 will be the fourth year of the Presidential Election Cycle. Historically, the third year has been the best of the four for the stock market. Stocks performed second best in the Cycle’s fourth year. More generally, while the U.S. economy avoided a recession in 2019, it is growing at a slowing rate. And, we know a government shutdown in 2020 was averted with $1.4 trillion spending agreement (which keeps the government going through its’ 2020 fiscal year ending in September). On to what I think…

U.S. Stock Market Outlook

As I reminded readers with my 2019 Outlook, “Bull markets are born on pessimism, grow on skepticism, mature on optimism and die on euphoria,” said Sir John Templeton. Bull markets do not end from old age. As mentioned above, the current bull market that began in March of 2009 is now the oldest ever. While it may not be young, this bull market is far from euphoric. Remember Alan Greenspan’s warning in 1996 that “irrational exuberance” could have inflated stock prices? Or, late 1999 and early 2000 when people were quitting their jobs to day-trade stocks? That’s market euphoria. More simply, the fact that this market is known as the, “Most hated bull market ever” speaks to anti-euphoria. I think it is a mistake to say, “Last year the stock market went up so much it can’t possibly do it again this year.” No correlation between one year’s gains and the next exists. Don’t assume 2020 must go down because 2019 went up. Looking ahead to this year, I have summed up 2020 thematically as a year of “Resiliency Amongst Uncertainty”. I expect earnings, which I have always believed to be the single most important long-term factor determining stock prices, to be robust next year, supporting a resilient U.S. stock market. They will increase over 2019, helped by lower-for-longer interest rates and a weaker dollar, and driven by efficiencies achieved through corporation’s innovative fiscal management. Working through my analysis, 3488 is my S&P 500 price prediction for 2020. The strong earnings and higher stock market will occur in the face on abnormally high global uncertainty. Beginning with impeachment proceedings, which history has shown can derail the stock market temporarily, 2020 will offer investors a full plate of FUD (Fear Uncertainty & Doubt). The high-profile U.S.-China trade tensions will continue to be a market concern. Will “Phase 1” go as expected? What then? “Phase 2, 3, 4….” Regulatory issues are expected to remain to cast uncertain climates for big tech companies and the “gig economy”. The high expectations from the 5G technological revolution my prove less certain in 2020 and have bigger impact in 2021. As the stock market proved again, it pays to expect the unexpected.

U.S. Economy 2020

Beyond Wall Street and on to Main Street, the U.S. economy will be recession free and continue to grow in 2020. I expect the U.S. Real GDP (Gross Domestic Production) to grow by 2% in 2020. Impactful macro economic indicators such as interest rates, inflation, employment, consumer spending, industrial production and manufacturing output, the housing market, and overall sentiment affect GDP. As 2019 ends and 2020 begins, the positive conditions of the economy’s variables will keep recession pressures away. With employment at its strongest in 50 years, interest rates still near record lows, and a big bump in wealth through increased home values and investment portfolios, the American consumer will keep on consuming. Consumer consumption has been, and will continue to be in 2020, the biggest contributor to economic growth. Low interest rates and tame inflation are further reasons to be optimistic about the U.S. economy in 2020. Contra to uncertainties from Asia to Europe, and the rest of the world, the U.S. economy will be resilient. Consumers, and manufacturers alike, had their confidence tested repeatedly in 2019 by global uncertainties from Saudi oil infrastructure to tariffs and trade. The abrupt about-face on interest rates was a big surprise early this year. The reminder was how data dependent the Fed is, and why we should pay more attention to economic indicators than what the Fed says. Like the stock market, the U.S. economy in 2020 will show resiliency amongst uncertainty.

2020 Global Outlook

My global outlook for 2020 is positive with an asterisk. My forecast is for a 3.2% global GDP growth rate. However, this growth will not occur if the trade talks do not go as expected, and worse yet, if additional tariffs are enacted. The world’s economy is awash in easy money. Including the three rate cuts by the U.S. FOMC, 20 central banks have eased monetary policy over the past 12 months.

Europe: Europe’s exposure to trade and reliance on manufacturing made it a casualty of the trade war and the global downturn in automobile production. 2019 saw the European Central Bank (ECB) take policy rates further negative and re-start quantitative easing. The Eurozone should benefit in 2020 from easier monetary conditions, the recovery in global manufacturing, the lifting of trade-war uncertainty and Chinese policy stimulus that increases import demand from emerging markets. The easing of political risk is also a boost to the outlook. This time last year, Italian 10-year government bond (BTP) yields were heading toward 4% and creating concerns about the solvency of Italian banks. BTP yields are under 1.2% in now, mirroring declines across Southern Europe and supporting financial conditions. This is being reflected in declining non-performing bank loans across Spain and Italy. The potential lifting of Brexit uncertainty is also a positive. Overall, I expect a gradual pick-up in growth across the Eurozone during 2020. The absence of inflation pressure means the ECB is unlikely to consider lifting interest rates.
Japan: Japan’s economy is suffering the after-effects of the consumption tax hike on October 1 and its exposure to the global manufacturing downturn. The uncertainty around the China-U.S. trade negotiations as well as Japan’s own tensions with South Korea have weighed on economic sentiment. Easing trade tensions and an improvement in global manufacturing should support Japan’s economy, as will a boost to spending and tourism from hosting the 2020 Olympics. There is also speculation that Prime Minister Shinzō Abe’s administration will launch a sizeable fiscal stimulus. Japan, however, is likely to remain an economic laggard relative to other developed economies. I expect persistent disinflationary pressures will keep the Bank of Japan in ultra-accommodative mode.

Emerging Markets: Emerging markets (EM) will walk a tightrope in 2020. They will benefit the most from a weaker dollar, but be hurt most by trade tensions. First, China. Chinese policy makers are balancing the short-term requirement for stimulus against the medium-term necessity to reduce leverage in the economy. Credit growth is unlikely to accelerate sharply, but the authorities have already reduced bank reserve requirements and cut policy rates. They are also likely to increase local government bond issuance to boost infrastructure spending. Gross domestic product (GDP) growth, however, is unlikely to rebound and should remain near 6%. As I said in my 2018 Outlook, China remains positive. Second, India. As one of the largest and fastest-growing markets for digital consumers, India is a market where disruptive technology is driving productivity and deflation more than generally expected. Key reforms-including the recent reduction in corporate tax rates, measures to improve the regulatory environment and monetary easing-will likely steady the economy. Taiwan is seeing some spillover benefits from the trade war as its companies start onshoring some operations. Government incentives to attract operations back to Taiwan mean that this will have ripple effects on the domestic economy. And, a third noteworthy EM country is Taiwan. Taiwan is seeing some spillover benefits from the trade war as its companies start onshoring some operations. Government incentives to attract operations back to Taiwan mean that this will have positive effects on the domestic economy.

WISHING YOU A GREAT 2020!