Common Cents & 2020: A Look Forward

December 31, 2019, by John Norris

“The groundhog is like most other prophets; it delivers its prediction and then disappears.”

Attributed to Bill Vaughan

 

Historically, I shy away from making too many public predictions, as I have found there is very little upside for doing so. If you get something right, it was a lucky guess. If you get it mostly right, it doesn’t count. If you get it wrong, someone will call you out. For instance, a co-worker reminded me this week I ‘predicted’ Prince Philip, Duke of Edinburgh would die by the end of this year. I am not sure why I made this particular forecast, but it is now 2:21 pm GMT in London as I type on the 31st, so it looks like I might get this one wrong…mostly.

In any event, here are a few stabs at what the future might hold:

  • Next year, the US economy will grow modestly, in the 2% range. The US consumer should be strong enough to ‘offset’ a slowdown in the ‘private fixed investment’ portion of the GDP equation (C+I+G +/-  NE). IF you want to see the future, following this link to the Bureau of Economic Analysis website and look at the breakdown for the 2nd and 3rd Quarters of 2019: https://www.bea.gov/news/2019/gross-domestic-product-third-quarter-2019-third-estimate-corporate-profits-third-quarter. It is hard to argue against this being the probable case scenario, at least at the start of the year.
  • The Federal Reserve would like to be able to ‘sit this one out’ in 2020, and not have to move the overnight lending target in either direction. It WILL have to continue to provide liquidity in the repo market and will NOT be able to shrink its balance sheet (unwind quantitative easing). In fact, it will likely have to grow it slightly over the course of the year as there are too many Treasuries to finance and too few players with the means of doing so in the overnight market. Combined, monetary policy will be neither restrictive or accommodative…simply practical.
  • Expect a more modest 6-8% return on US stocks next year. This is the proverbial low-hanging fruit forecast. Throw a 5% ‘equity risk premium’ on top of the 1.90% yield to maturity on the 10-Year US Treasury Note and voila! Tricks of the trade my friends. In truth…
  • There is little reason to believe there will be continued ‘multiple expansion’ in 2020. In 2019, the price/earnings ratio on the S&P 500 increased from roughly 16.5x at the beginning of the year to about 21.5x by the end of it. This was due to the decline in interest rates, thanks largely to the US Federal Reserve (let alone other major central banks). Typically, stocks can ‘support’ a higher absolute valuation (i.e. a higher P/E) when interest rates fall…otherwise known as multiple expansion. IF interest rates aren’t falling and the Fed isn’t cutting the overnight rate, etc., it is hard to forecast higher valuations for stocks. This takes us back to more ‘normalized’ return predictions, like the one in the previous bullet point.
  • So, if the US market should grow 6-8% next year, what does that make the range with the S&P 500 at roughly 3,220 at year-end? 3,413 – 3,478. Now, what is the chance of that being right? I would give it the flip of a coin, but it is a reasonable, explainable return assumption.
  • If the Fed is on hold and if the rest of the world’s central banks aren’t in a hurry to do anything either, currency trading could be pretty boring in 2020, with the US dollar trading in a relative tight range against a trade-weighted basket of primary currencies. The moral of the story? If the dollar isn’t going to weaken sharply, it is hard to recommend realizing a bunch of capital gains by selling US stocks to, say, double your international allocation. However, after years of continued underperformance, the easy money betting against international stocks might be over…might. That is NOT an endorsement as much as a statement of the obvious.
  • The banking industry will consolidate in 2020, as M&A activity heats up. There are too many “stuck in the middle” firms in an industry that is seeing increased competitive from both traditional and non-traditional sources.
  • In a move no one would have seen coming a decade ago, Walmart takes steps to acquire FedEx. This makes perfect sense as it battles Amazon.com for retail supremacy in the United States and it needs the necessary infrastructure. In business school, we called this vertical integration. Disclosure: Oakworth Capital Bank does not make a market in either stock and I do not directly own it personally.

  • The commercial viability of sub-orbital flight becomes more readily apparent, as business luminaries like Jeff Bezos, Richard Branson, and Elon Musk rush to make it happen. This will cause a furor in global political circles over who owns the airspace in outer space where these ‘planes’ will be operating.
  • Venezuela will succumb to its self-inflicted wounds, as the army finally turns its back on Maduro and he flees to Cuba (with US complicity). Unfortunately, the extent of the economic damage and brain drain will have been so severe it will take decades for the country to recover.
  • Brexit will finally happen. The powers that be will attempt to reestablish a ‘hard border’ between the Republic of Ireland and Northern Ireland. This will be incredibly unpopular. By the end of 2020, there will be serious talks, at some level, about Northern Ireland leaving the United Kingdom, and the unification of the island under the Republic’s control.
  • South America’s travails continue as: 1) the Peronists make a bad situation worse in Argentina, and the economy crumbles under the weight of fiscal imprudence and corruption; 2) strife along ethnic/demographic lines almost boils over into civil war in Bolivia; 3) populism in Chile takes over, and a once stable country goes down an Argentine-style slippery slope, and; 4) things stabilize somewhat in Brazil, but discontent over inequality and government corruption keeps the country on the proverbial tipping point.
  • Prime Minister of India Narendra Modi will largely ignore the global condemnation over The Citizen (Amendment) Act of 2019. The message from New Delhi will effectively be: “mind your own business and we will mind ours.” By the end of 1Q 2020, people will have largely forgotten all about it.
  • Although we won’t get the results until later, the 2020 US Census will show greater than expected emigration from the Northeast and Midwest to the South and Southwest. Traditional ‘red states’ will stand to gain seats in the Congress after the reapportionment. It won’t be a huge number, but enough to elicit cries about supposed unfairness of the electoral college from left-leaners. This is more of a 2021 prediction, but it is a slam dunk.
  • The Senate will NOT remove the President from office. As the obviousness of this becomes clearer, a lot of people will wonder what in the world “that mess was all about.”
  • After a contentious primary season, Joe Biden emerges as the Presidential candidate for the Democratic Party. His candidacy will be extremely weakened by the process, and doesn’t unite the party in a meaningful way with exception of “Beat Trump.” This message fails to energize independent voters and the more moderate/conservative elements of the Democrats themselves. The final popular vote will be closer than it was in 2016 and the electoral college will look eerily similar.
  • However, the Biden candidacy itself WILL avert the massive asset allocation readjustments a Bernie Sanders candidacy would have caused. Sorry gold, Bitcoin, and cash.
  • Doug Jones will no longer be the junior senator from Alabama come January 2021.
  • Novak Djokovic will win the Australian Open, and Raphael Nadal will win the French.
  • The Patriots will not win the Super Bowl LIV, and will struggle to make the playoffs next season…if at all. Tom Brady will retire, and the Patriots dynasty will be unofficially, officially done. It has been an awesome run.
  • MLB will announce the league will contract to the following teams: Cardinals, Cubs, Red Sox, Giants, Dodgers, and Yankees. That way someone will watch the World Series in the Fall. Obviously, that is a joke. However, the league DOES start to analyze what should be done with struggling franchises in Miami, Tampa Bay, Detroit, and Baltimore.
  • Hollywood produces more sequels and movies about comic book characters. The grumpy old man says: “If you have seen one, you have seen them all.” Spoiler alert: I am the grumpy old man.

  • No one over 50 will have heard of: 1) the Grammy Award for Record of the Year; 2) the Grammy Award for Album of the Year; 3) the Grammy Award for Song of the Year (why this is different then the others is a mystery to most); 4) the Grammy Award for Best New Artist, and; 5) any other Grammy Awards for that matter.
  • The earlier prediction about Prince Philip comes true. This will engender debate about whether the Queen will step aside, but she won’t do so. Why in the world would she? She is the Queen of England.

 

Happy New Year!

John Norris

John Norris

Chief Economist

 

This report does not constitute an offer to sell or a solicitation of an offer to buy or sell and securities. The public information contained in this report was obtained from sources and vendors deemed to be reliable, but it is not represented to be complete and its accuracy is not guaranteed.

This report is designed to provide an insightful and entertaining commentary on the investment markets and economy. The opinions expressed reflect the judgment of the author as of the date of publication and are subject to change without notice; they do not represent the official opinions of the author’s employer unless clearly expressed within the document.

The opinions expressed within this report are those of John Norris as of the date listed on the first page of the document. They are subject to change without notice, and do not necessarily reflect the views of Oakworth Capital Bank, its directors, shareholders, and employees.