Macro Musings December 2019
OUR 2020 OUTLOOK
- We expect global growth to rebound in 2020, the US consumer to remain strong, and the Federal Reserve not to raise rates before the 2020 elections.
- The S&P 500 is likely to finish the year with a gain of at least 20%. Historically, these strong annual gains have been followed by better than average returns in the following year.
- We do not anticipate a recession in 2020, which would be welcome news for the market. The S&P 500 has finished higher 87% of the time when the economy is growing.
GLOBAL ECONOMY SET TO REBOUND
We believe that the global economy, which has struggled since early 2018, is set to rebound in 2020.
Leading indicators point to an improvement in economic growth ahead. Monetary policy has been aggressively easing, with central banks across the globe cutting rates after spending most of 2017 and 2018 raising them. Rate cuts tend to stimulate the economy.
The chart below shows the percentage of central banks around the world whose last action was a rate cut. It suggests that the more central banks cut, the better it is for the global economy, as measured by the JP Morgan Global PMI. The PMI measures the outlook for global manufacturing with a reading above 50 indicating expansion. The lead time is about 8 months (from Pictet Wealth Management):
In addition, changes in the US money supply tend to occur ahead of changes in the global economy. The chart below suggests changes in money supply lead the Global PMI by 18 months. We are less concerned with the exact timing of the indicator and more focused on the general trend, which implies a rebound ahead (from Nordea Bank):
US economy should remain constructive
We think that the US economy will continue to grow, supported by low unemployment, strong consumer spending, and a rebounding housing market.
Initial claims for unemployment remain near cycle lows:
Retail spending keeps rising. Remember that retail sales usually flatten before a recession occurs:
Lastly, new home sales have improved significantly after declining through 2018:
Although most home transactions involve existing homes, new home sales are crucial for the overall economy because they involve multiple industries and promote significant spending by the purchaser.
The fed WILL PROBABLY NOT RAISE RATES Until after the election
After an ill-advised rate increase last December which helped spark a 15% decline in the market, the Fed quickly reversed course and has now cut interest rates three times in 2019. Inflation remains low and the economy, while expanding, is not overheating. We think the Fed is unlikely to raise rates before the election. It does not want to get in the middle of politics and will err on the side of caution given low inflation expectations. If it takes any action, we think it will be another rate cut in the spring should the economic data underwhelm.
Conditions are much more favorable heading into 2020
There is a stark difference between the backdrop heading into 2020 as compared to this time last year. We’ve taken many of the points above and summarized them for you in the table below:
BIG UP YEARS FOR THE MARKET OFTEN LEAD TO FURTHER GAINS
Unless equities decline by more than 8% in December, the market will finish the year with an annual gain of over 20%. It will be the 4th time the S&P 500 has been up at least 20% since the global financial crisis (2009, 2013, and 2017 were the other years).
You may think that following a strong year, the market would take a breather or even be negative the following year, but this has not been the case. Years in which the market was up 20% or more were followed by stronger than average performance, with positive returns occurring around 80% of the time (from SunTrust via the Wall Street Journal):
Although subsequent annual returns were above average historically, we believe the most significant statistic is that there was not a single case that saw double digit declines after a big up year. This shows strong market performance doesn’t reverse easily.
THE BASE CASE for 2020: continued economic expansion
In summary, we believe that the global economy will rebound next year, Fed policy will remain accommodative, and the consumer will continue to support the US economy. We expect that 2020 will represent the 12th consecutive year of overall economic expansion.
What are the implications for the market if our prediction comes true? As we outlined in our 2019 Outlook, a growing economy increases the probability of positive market returns. Stocks have generated positive returns in 87% of the years when the economy was growing (from Goldman Sachs):
This is the final Macro Musings of the year. We will publish our 2019 Year in Review next month.
From all of us at Corbett Road, we wish you a happy and joyous holiday season and a successful New Year. Thank you for your continued trust and business.
The chart(s)/graph(s) shown is(are) for informational purposes only and should not be considered as a suggestion of any investment recommendation, investment strategy, or as an offer of advice to buy, sell, or exchange any investment product or investment vehicle. Past performance may not be indicative of future results. While the sources of information, including any forward-looking statements and estimates, included in this (these) chart(s)/graph(s) was deemed reliable, Corbett Road Wealth Management, Spire Wealth Management LLC, Spire Securities LLC and its affiliates do not guarantee its accuracy.
The views and opinions expressed in this article are those of the authors and do not necessarily reflect the opinions of Spire Wealth Management LLC, Spire Securities LLC or its affiliates.
All information is based on sources deemed reliable, but no warranty or guarantee is made as to its accuracy or completeness. MACROCASTTM is a proprietary index used by Corbett Road Wealth Management to help assist in the investment decision-making process. Neither the information provided by MACROCASTTM nor any opinion expressed herein constitutes a solicitation for the purchase or sale of any securities, and should not be relied on as financial advice. The phrase “the market” refers to the S&P 500 Total Return Index unless otherwise stated. The phrase “risk assets” refers to equities, REITs, high yield bonds, and other high volatility securities. Past performance is no guarantee of future results.
Spire Wealth Management, LLC is a Federally Registered Investment Advisory Firm. Securities offered through an affiliated company, Spire Securities, LLC, a Registered Broker/Dealer and member FINRA/SIPC.
Corbett Road, Spire Wealth Management and its affiliates are not affiliated with SunTrust Advisory Services or SunTrust Private Wealth.