Looking at 2020, the outcome may come down to our confidence.January 1, 2020
By the time this post hits your inbox it will likely be 2020. I thought the first note out of the gate for this new year would be to summarize a recent article I read from Bill Ryan the Senior Investment Strategist at Comerica Bank.
The article starts with a recap of what we were thinking exactly one year ago. As we came into 2019, the “common knowledge at the end of last year was…”
- The economy was slowing and there was a chance we were slipping into, if not already in, a recession.
- The Fed had just hiked rates for the fourth time.
- Analysts were falling all over themselves to reduce 2019 earnings estimates.
- There were hostile rhetoric around trade wars escalating.
- Markets began to free fall in the fourth quarter which resulted in all but a few global markets at a negative for the year.
- By Christmas Eve, the S&P 500 had fallen eight consecutive days and was 19.3% lower than when the quarter began.
What actually happened in 2019 was…
- The Fed lowered interest rates three times and stopped the reduction of their balance sheet.
- The US Economy slowed, but continued growing setting the record for the longest economic expansion.
- Inflation remained contained.
- Unemployment was at a 50 year low.
- Wages grew at 3.3%.
- The S&P 500 stands at 3,220 (at the time of this article) which is up ~28%.
- The US consumer continued to spend as we avoided a recession.
With the close of 2019, Bill Ryan noted that “only 6% of the gains this year can be attributed to earnings growth; the balance has been through multiple expansion. The S&P 500 began 2019 with a forward P/E of 14.5x earnings and is now entering December with the S&P 500 trading at 17.7x forward earnings; a reflection of rising investor optimism and appetite for risk as imagined worse case scenarios failed to materialize.”
So what is being thrown around today? Next, Mr. Ryan outlined what is “common knowledge today” and the list is here:
- The US economy will avoid a recession in 2020 as GDP growth will be somewhere between 1.8% and 2.2%.
- Corporate earnings will grow by 10% this year, and another 10% in 2021.
- Inflation will remain well-anchored; the Fed is on hold for the foreseeable future with low rates providing valuation support for equities, if not room for further multiple expansion.
- Unemployment and consumer spending will continue to be a bright spot and providing stability to the economy.
- Uncertainty around trade will diminish as the year progresses, helping the global economy to find its footing after seven months of negative growth.
The projections from Mr. Ryan’s article are the economy will avoid a recession in 2020 and growth will be on the low end of expectations but warns that the risk of a recession in 2020 are well above average. Secondly, the above mentioned earnings growth of 10% is over optimistic with an economy that is only growing at 2%. It is more realistic to expect 2020 earnings to fall to low single digits. It was also noted that investor optimism could fade if the market should produce “lumpy” or “disappointing” results. However, the big wild card is consumer and CEO confidence.
Consumer confidence was one of the reasons noted for 2019 being a good year. With that being the case, there is an eye toward the Consumer Confidence Index. If consumers decided to reign in spending then that may be all that’s needed to end our current economic expansion. Secondly, the CEO confidence is also something that is tracked and currently the “CEO confidence is the lowest it’s been since the Great Financial Crisis.” Furthermore, “it will be increasingly important how CEOs respond to incoming data over the course of the year. If they respond to weak data and margin pressure by targeting costs – read labor – then things could turn bad quickly.”
As you know, 2020 is an election year, and election years have historically been up by 7% (on average). The S&P 500 is at an all time high, despite the economic data. Finally, Mr. Ryan concluded with a fun fact noting that “when markets make an all-time high, there is an 85% chance they will be higher 12 months later by an average of 11%.” So, as we enter 2020, let’s try to say positive things to those CEOs so they can become more confident and we can minimize the possibility of a recession!