Marco Fragnito, Managing Principal | Robert R. Fragnito, Chief Operating Officer | Print Version
- This month’s market commentary features our outlook for 2020. In this edition, we review general market consensus forecasts for 2020 and compare them against our expectations for the year.
Equity markets got off to a strong start to the new decade, with the S&P 500 adding more than 3% by mid-January on the back of stronger than expected early fourth quarter earnings reports. Further aided by the signing of the “phase one” portion of the new trade agreement between the US and China. By mid-month, markets staged broad based selloffs both at home and abroad with the news of the fears of the coronavirus outbreak in China becoming a pandemic combined with the US killing of a top Iranian military general. Investors feared slower global growth, supply chain disruptions and the potential for a military confrontation with Iran. The S&P 500 and Dow Jones Industrial Average lost all their gains and finished the month of January with small declines, while the NASDAQ Composite managed to rise 2% despite investors’ concerns.
With some 50% of S&P companies reporting earnings, growth appeared on track to show a rise of 0.3% versus forecasts of a 1.4% decline, according to Bloomberg. This provided basis for investors to push the Dow Jones Industrial Average over the 29,000 mark for the first time in its history.
The economic data remained mixed. On the downside US manufacturing activity contracted for a straight fifth month per Institute of Supply Management, the December jobs report was slightly lower than expected with the US economy adding 145000 new jobs, versus expectations of 160000. This was partly offset by US GDP growing at 2.1% annualized for the fourth quarter, slightly better than expected.
With continued mixed economic data and fears of slower economic global growth the yield curve once again inverted as investor demand for perceived safe assets, US Treasuries, increased. The Federal Reserve also held their key federal funds interest rates steady and signaled plans to remain on the sidelines in 2020. This sent the yield on 10-year Treasury Notes to 1.51%, the lowest since last October.
2020 MARKET OUTLOOK
Before attempting to articulate a market outlook for the coming year, we at MCF Capital Management like to see how the previous year ends and how the new one begins. The reason for this is that trading data collected at the turn of the year has usually proven to be very insightful as to the direction of equity markets for the year. The start of this year has provided very useful insight into the potential for financial markets, especially when we consider what appears to be a new trade agreement between the US and China, and the outbreak of the coronavirus in China.
In my more than 35 years in the investment management business, I have never seen anyone be consistently right when it comes to forecasting on the US economy or financial markets. We prefer to focus on looking at what the consensus is in the areas of economic growth, unemployment rates, inflation, corporate earnings and such things as energy prices. Also, this year being a Presidential election year we have yet one other factor to consider. Based on market consensus we attempt to ascertain whether we agree or disagree with market expectations. This provides us with a guideline in helping us determine if our asset allocation need any adjustments versus our longer-term expectations driven by our data analysis. As for sector selection we remain committed to being invested in the leading long-term investment trends.
General Market consensus forecasts for major economic statistics center around the following estimates for 2020:
- US GDP Growth of 1.8%
- US Unemployment Rate of 3.6%
- Core Inflation Rate of 2.2%
- Federal Fund Rate 1.25% to 1.50%
- S&P Earnings Forecasts $162-$180
- WTI Crude Oil Forecasts $55 to $65
Of note, the outbreak of the coronavirus in China estimates appearing to be falling across the board for major economic statistics. This appears justified considering the apparent inability of the Chinese government to get a handle on the magnitude of the crisis. With the benefit of this information we have made slight adjustments to our own outlook in certain areas.
We disagree with the US GDP growth consensus of 1.8%, we expect despite the current health crisis in China for GDP to come in above at 2% growth for the year as whole. We would expect any surprises to be on the upside. Based on pent-up business investment due to trade uncertainties present in 2019, the health crisis in China being of shorter duration than expected and a resumption of production of Boeing’s 737 Max sooner rather than later. We do expect the unemployment rate within the consensus range on a continued increase in the participation rate. Our inflation expectations are in line with the consensus. We expect the Federal Reserve to allow the economy to run hotter to achieve and surpass their stated inflation target rate of 2% and with 2020 being an election year they will do as little or as much as is necessary to see the economy grow as to not appear to favor one candidate over the other. We did not expect to see any rate cuts in the coming year, but with the initial economic impact being felt around the world from the outbreak of the coronavirus a rate cut is being priced by markets sometime this summer. We would not be surprised if the Federal Reserve did cut interest rates as insurance against downside risks to the economy. The question we ask ourselves is what benefit it would bring with long term interest rates near record lows.
The S&P forecast range is narrower than it was last year currently, however growth prospects appear much better for the next 12 months. We expect earnings for 2020 to be in the upper half of the range and expect them to be a driving factor in determining equity prices, versus last year when we saw a multiple expansion occur in the face of basically flat earnings. We do agree with crude oil price forecasts with potentially a slightly downward bias in the first part of the year.
In the equity markets, based on our economic expectations we remain bullish for 2020, but not to the extent we were last year. Last year we laid out several reasons for us maintaining an above bullish consensus and expecting upside surprises to market indexes. This year we still expect equity markets to outperform very subdued expectations and look for low double digit returns for the major indexes, with slightly better performance from individual market sectors.
The risks to our expectations for 2020 are another event such as we are presently experiencing with the coronavirus, the virus becoming a possible pandemic and the largest risk we see is political. With the Presidential election on the horizon and no clear challenger emerging from the Democratic field, it is difficult to ascertain the actual risks. What is clear is that anything other than moving the country towards full blown socialism or worse, markets should be able to adjust to the outcome. Usually, the preferred outcome when a President is up for re-election is that he be re-elected especially if his administration’s policies have benefitted the financial markets and investors.
In the fixed income markets, we enter 2020 concerned of the potential negative outcomes for investors. While the outbreak of the coronavirus has once again forced interest rates back down to levels seen last fall and previously in the summer of 2016, we feel strongly that intermediate and long-term rates have bottomed and are headed higher. We believe that alternatives to bonds will provide investors with much better returns, if not outright helping them avoid losses over the course of the year. The margin for error appears very, very small to us with 30-year US Treasuries yielding just slightly above 2%. A rise to interest rates last seen in 2018, when the economy was growing faster may well lead to double digit losses for bond investors. The reasons are many, and we suggest clients and readers speak to us if they have any concerns.
In summary, we expect equity markets to perform well in 2020, but not to deliver the spectacular returns we saw last year. We entered 2019 with our portfolio’s asset allocation in a defensive posture and quickly moved to being fully invested and saw excellent returns for the remainder of the year. We enter this year with our asset allocation fully invested and expect to move towards a more defensive posture as the year progresses. In part due to it being a Presidential election year. With expectations that Federal Reserve’s monetary policy remains on hold, a US domestic economy beginning to re-accelerate and the removal of trade uncertainty we would expect equity market indexes to deliver low double-digit gains for the year. In the fixed income markets, investors should be very attentive to any shift in sentiment, especially on growth expectations, as this may lead to increased volatility in the sector and potential losses. The risk reward equation does not appear favorable to us in the bond market both for US Treasuries and investment grade corporate bonds.
We wish you the very best and a prosperous 2020!
If you have any questions please contact us directly at 949.472.4579, and feel free to forward this report and our contact information to anyone who might be interested.
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The opinions expressed here reflect the judgement of the author(s) as of this date and are subject to change without notice. Information presented here is for informational purposes only and does not intend to make an offer, solicitation, or recommendation for the sale or purchase of any product, security, or investment strategy. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed here. The information being provided is strictly as a courtesy.
Wells Fargo Advisors, Angela Shin & Jack Kraft, “Monthly Market Commentary,” February 4, 2020. Wells Fargo Investment Institute, “2020: A Call for Resilience, “ December 2019. CNBC, “The CNBC Market Strategist Survey.”