Another year has come and gone. 2019 was a breakout year for the US economy and global stock markets. Heading into last year, investors and analysts were guarded given the Federal Reserve’s blunder in 2018’s fourth quarter, which I refer to as, “The Powell Panic of 2018.”
We spent several months reversing the economic and financial trauma that Chairman Powell caused in 2018. Thanks to a strong US economy, featuring six-decade high records in job creation and low unemployment; a lack of inflation; and, the disappearance of volatility, markets swept to all time highs.
Late in the fourth quarter of 2019 a series of tailwinds materialized, eradicating then existing headwinds. These tailwinds are:
- The passage of the USMCA (US-Mexico-Canada) Trade Agreement by the House of Representatives which will soon pass in the Senate and be signed into law by President Trump
- Phase 1 trade agreement with China
- A weak impeachment of President Trump which will die in the Senate; allowing Congress to (hopefully) focus on more economic stimulative legislation such as infrastructure
- Boris Johnson’s election as Prime Minister of the UK, all but securing Brexit after a nearly four-year long process
2020 will be highlighted by a Presidential and Congressional elections in the United States; increasing global trade; tensions in the Middle East; Brexit (finally !!!); and, rollout of 5G wireless technology (more on that later)
Without further ado, in the spirit of the old Wall Street Week with Louis Rukeyser, wherein his panelists were asked at the outset of the year to make their predictions, which could not be changed thereafter, I present My Gut Feeling for 2020:
- 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 4thquarter 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 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.
- 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.
- 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.
- 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 – 5thgeneration 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.
- 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.
- 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.
- 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.
- 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.
- 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.
Best wishes for a Happy and Healthy 2020. 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 Asset Management, LLC was long MPC - although positions can change at any time.
Scott Rothbort is the President & Founder of LakeView Asset Management, LLC, (LVAM) an investment advisor representative, specializing in high net worth private wealth management. LVAM is affiliated with Kingswood Wealth Advisors Services, a registered investment advisor. 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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