As 2020 began, I published My Gut Feeling For 2020. Now that 2020 is in the books, I wanted to look back at how my expectations and predictions fared in 2020. Recall these predictions were made in the spirit of the old Wall Street Week with Louis Rukeyser show in that they were fixed a year ago and could not change. If there was any year that you wanted to make some changes, 2020 was a great candidate. Yet, all that I changed were the composition of the portfolios, not my predictions. The original commentary is in lighter print and in bold italics are the comparison to actual results and explanation, as warranted.
- The SPX ended 2019 at 3,230.78, which using Standard & Poor’s 500 (SPX) earnings estimates of about 159.00 implies an index price/earnings multiple (PE) of 20.32. Recall that the equity markets in 2019 benefited from a near 3 point multiple expansion from 17, while earnings were just about flat. Some of the PE expansion in 2019 was taken from PE contraction in the 4th quarter of 2018 due to the Powell Panic. In 2020, nearly every analyst and investor that I read or speak with is looking at SPX earnings in the range of 175 to 177.5. I concur. Standard & Poor’s is expecting earnings of 176.16. So, for 2020, I am calling for earnings growth with PE moderation. Earnings growth will come from continued strong domestic growth; benefits from the USMCA and Phase 1 China trade agreements; and a reawakening of economies in the rest of the world. Using a PE ratio of 20.4 with earnings of 175, I arrive at a year-end SPX price target of 3,570, another all-time high, an increase of nearly 10.5% from 2019’s year-end level of 3,230.78. Along the way the SPX will experience a normal correction (see #8 below). The year’s low for the SPX will be put in on Jan 2 and the high of the year will be 3,675 – The SPX ended the year at 3,756.07 which was above my price target. Liquidity injections into global economies found its way into stocks rather than bonds. Along the way, the SPX had a COVID-19 crisis low of 2,192.21 and a year high of 3,770.42, a few days ago in late December.
- The Federal Reserve Open Market Committee (FOMC) lowered Fed Funds target by ¼% three times in 2019. In 2020, the FOMC will be on hold, making no changes to its Fed Funds target. However, the Fed will continue to increase liquidity through expansion of its balance sheet; a mini-quantitative easing. – The FOMC made no changes to its target interest rates. Plus, as I mentioned above, quantitative easing style liquidity injections were all the rage across the COVID infected globe.
- As for US Treasury securities, finally, a bottom in the yield curve will arrive. This will be a result of improving economic activity around the world and eroding of negative interest rates in Germany and Japan. I expect a normal yield curve such that by the end of 2020, the US Treasury market will yield as follows: 5-year 1.75%; 10-year 2.00%; and 30-year 2.50%. No matter which way you cut it, try to stay out of bonds. If you must hold bonds, stay to maturities of ten years or less. – For yet another year, rates dropped across the yield curve. The question now is does inflation materialize or will monetary authorities push US yields into negative territory.
- Flat to rising interest rates will put a cap on value stock prices. Hence, a dividend-oriented portfolio, such as our Dividend Value Strategy will earn its dividends but generate a lesser amount of capital appreciation in 2020 than in 2019. – This was correct in some part but for all the wrong reasons. Dividend stocks were laggards and did not rebound from the first quarter’s COVID sell-off with the same magnitude as did Growth stocks. The reason was not because of rising interest rates but because government-imposed shutdowns caused strains on credit quality of value stocks.
- Growth stocks will continue to be the go-to segments of the market. On a sector basis, technology, real estate, and industrials will offer the most opportunities. Apple (AAPL) and Microsoft (MSFT) did not peak in 2019 and have more room to run. Energy and retail will remain laggards. 5G – 5th generation wireless technology and software – will be leaders in 2020. The ever-expanding diabetic medical device and pharmaceutic business will remain in stealth growth mode. Streaming entertainment will continue to take market share. However, Roku (ROKU) will remain a frustrating stock that is best traded than owned for the foreseeable future. – While the COVID sell-off (some incorrectly thought it was a bear market) in February and March did damage to all stock sectors, it was Growth stocks that led the surge thereafter. The key was to change one’s investing thesis to focus on the new “Work and Entertain From Home” status quo. 5G was indeed an important contributor to growth. Retail and restaurants were bifurcated such that large, big box and internet retailers and delivery eating services were winners while the rest of those sectors suffered. If it streamed it made you money in 2020, including the frustrating ROKU stock. Energy and financial were cellar dwellers, once again.
- The US economy will continue to grow at a moderate pace, in line with the first three years of the Trump Administration. I expect real GDP in the US to grow by: 2.0 to 2.5% in each quarter of 2020. There will be no recession in 2020, unless some unexpected exogenous event takes place to derail the economy. – Did I say that an exogenous event could derail economic growth? Pre-COVID the economy was on a solid growth trajectory. Then COVID sent the economy tumbling with a subsequent nearly mirror image recovery.
- Crude Oil will peak in the first quarter of 2020 due to tensions in the Middle East. However, global supply will continue to flood the markets and force prices lower the rest of the year. Hence, West Texas Intermediate crude oil will peak at $65/bbl. and then head to the upper 40s before settling in the mid-50s. – Again, COVID played a major role in the energy markets. However, a rogue (and wrong way) trader drove crude oil prices to negative levels in an anomalous manner on the short end. That was short lived and by the end of the year, NYMEX Crude oil settled in at just about $48.50/bbl.
- In politics, we have a Presidential and Congressional election in 2020. Before that, the Impeachment of President Trump will be put to an end in the Senate. As for the Presidential election, I believe that the Democratic nomination will be decided at the convention, not before. That nominee could be someone not currently on the ballot. President Trump will have an 80% chance of being reelected (recall though that I predicted in My Gut Feeling for 2016 that I expected Hillary Clinton to win). However, the more important races will be in the Senate where the Republicans have 23 seats up for grabs versus the Democrats having 12. Hence, there is a chance, I will say 1 in 3 that the Republicans lose the Senate. There is also a chance, about 20% that the Republicans take back the House. Equity markets will be a bit jittery from August through October, when a 5 – 10% pullback will likely occur. After the election, markets will rally into year-end. – President Trump lost his bid for reelection but do not expect him to live the next four years on the beach or golf course. The Democrats held onto the House but lost a significant number of seats. As I write, one Georgian Senate seat broke for the Democrats and another is likely to, netting a 50-50 split but taking control with the new vice president being a swing vote for the Democrats. What this all means; I will discuss in My Gut Feeling for 2021 next week.
- Despite a strong economy, several companies will have adverse credit events. Likely candidates in the public markets are Ford (F), Pier One (PIR), and JC Penney (JCP), though many non-public companies, especially in retail could experience credit problems and bankruptcy. – I was pretty much spot on here. JCP and PIR filed for bankruptcy. F, which went from one of the best run automotive companies to one of the worst, had to suspend its dividend. In the automotive sector, the standout companies were Tesla (TSLA) and Carvana (CVNA).
- Another pre-IPO company will prove to be a scam just like We Work. The IPO market will increasingly be direct to market rather than traditional manager and underwriting led IPOs. Airbnb will come to market but suffer the same fate as Uber (UBER) and Lyft (LYFT). More faux meat companies will also come to market. They will be overvalued and drag valuations for the existing faux meat companies like Beyond Meat (BYND) lower. – Airbnb (ABNB) and Doordash (DASH) were two of the year’s successful IPOs. There were a few clunkers, but none that really come to mind or of the magnitude of We Work.
Best wishes for a Happy and Healthy 2021. As always, please contact me if I can help you with your investment needs or for media appearances. Also, feel free to post your comments / questions to My Gut Feeling and pass it on to relatives, friends, and colleagues throughout the year.
Disclosure: At the time of this commentary Scott Rothbort, his family and/or clients of LakeView AssetManagement, LLC was long AAPL, CVNA, MSFT, SPY, SSO , SPXL & TSLA; although positions can change at any time.
Scott Rothbort is the President & Founder of LakeView Asset Management, LLC, a registered investment advisor specializing in high net worth private wealth management. For more information on investing with LakeView Asset Management, LLC call us at 888-9LAKEVIEW or request more information by clicking on the contact button on the top right-hand corner of the website. LakeView Management, LLC is a Nevada LLC, with its principal office located in Henderson, NV and branch office located in Millburn, NJ
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