With another year and decade in the history books, 2020 has a tough act to follow, as 2019 was a big surprise for the financial markets. They did 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 investment markets and economies for the new year. Below are my forecasts for the U.S. markets, and next month will be my forecasts for the 2020 Global Outlook.
My outlooks always begin with what I know, then to what I think, and finish with what I will do. So, what do we know? 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 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 conditions and a “TINA” (There is No Alternative) mentality to stocks, 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. Moreover, 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.
What I Think: Resiliency Amongst Uncertainty
As I quoted in 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, 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. 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 drop because 2019 rose. Looking ahead, 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 factor determining stock prices, to be resilient this year. They will increase over 2019, supported 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 resilient 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).
Beyond Wall Street and on to Main Street, the U.S. economy will be recession free and continue to grow in 2020. 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. Expect more of the same in 2020: resiliency amongst uncertainty.
Look for part 2 of my outlook next month: 2020 Global Outlook.
Wishing you a healthy and happy New Year and Decade!
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