U.S. Economic & Capital Market Outlook 2020

Matthew Unger |

U.S. Economic & Capital Market Outlook 2020

Focus Asset Management Research

by Matthew Unger | 15 January 2020

We meant what we said nearing the end of 2019, and are officially forecasting a good-to-great year in capital markets. We expect the S&P 500 to grow 10-12% and have our 2020 S&P year-end target at 3,600. As 2019 fades into the rear-view mirror as a remarkable year in markets, and investors start to forget 2018, there are more reasons to be bullish than bearish in Week 566 of the longest economic expansion since the Civil War.

While we are not forecasting a recession or a bear market, we urge investors to expect heightened volatility in the months to come, and not to deviate from their current plans and strategies.


Some Key Points Driving Our 2020 Forecast


Strong Employment Trends Continue: 2019 saw the lowest unemployment since the 1960s; while the pace of employment growth is likely to moderate amidst these constrained conditions, we anticipate unemployment will remain largely unchanged through 2020.


The Fed: The Fed cut rates in 2019, and they appear to be on hold for 2020. On that basis, it’s all about earnings growth. Many have said The Fed is being too tight and that this will cause a recession. We simply disagree with this.


Low-to-No Yield in Bonds: In 2019, 1/3 of global bonds had negative yields. This pushes foreign investment into higher-yielding US bonds, which will help keep interest rates low for the forseeable future, which is another positive for the US consumer.


The Trade “War": With the President expected to sign Phase One of the trade deal today, we expect this trade truce to boost capital spending in 2020. Additionally, the grueling effects anticipated by the Trade Deal were shrugged off by the market as the US & global economies plow onward.


Undervalued Markets: You read that correctly; some models are suggesting that markets are as undervalued by as much as 37%. Given that we take a value-approach as an Investment Firm, we see a lot of opportunity even in sectors that may not be considered “sexy” by other investors. Where there is a gap in expectations vs reality often lies opportunity for investors.



So Just How Good was 2019?


The 31% S&P 500 total return wasn’t entirely unique, but is also not terribly common. Years where markets return 30-40% have only occurred on average once every ten years, and never occurred consecutively. The last time we had a year like this was 2013 and 1997 before that.


So what contributed to such a wonderful year in the markets? Well, for one thing, the correction of 2018 had interesting timing, and as such 2019 already had a high probability of being an outstanding year in markets, but that’s not all that happened.


  • All major asset classes had positive returns, as did all US equity sectors; that has only happened 4 other times in the past 20 years.


  • US earnings growth tipped negative...but the market rallied because P/E multiples rose 4 points to 18x, the largest increase of the last 20 years. It’s very unlikely the P/E multiple would expand again after such a big year.


  • $737bn of US share repurchases were the 2nd-largest ever; without buybacks we would have seen a deep earnings recession.


  • A third of global bond yields fell below 0% for the first time; this means bonds are more vulnerable than ever to the threat of higher inflation and interest rates.


  • The US/China trade deal implies, via tariff reductions & new exports, a benefit of $133bn to the US economy in 2020.



So What Will Drive Equities Higher?

We mentioned most of these above, but we expect The Fed to remain neutral this year and not cut rates. It would be necessary to remain neutral in our opinion since current 2-yr Annualized GDP is around 4% and the Fed Funds Rate is at 1.5%. Said differently, we expect The Fed to begin raising rates likely in 2021 to continue to control higher inflation and stronger growth.


Trade Deal: Expected to be signed today, and likely signed by the time of this publishing, we expect corporate investment to rise, US construction spending has rebounded to 14-month highs and the first round of Q4 earnings calls are already pointing to a spectacular finish to 2019.


Inventory Restocking: Early-stage consumable inventories are very low and some analysts expect a rebound...restocking will be very bullish for cyclicals.


Unemployment: We expect the US unemployment rate to remain low as we continue into this record-breaking, growth-fueled economic expansion; perhaps a slight uptick in January numbers due to seasonal jobs coming to an end in December, but we believe this already to be  priced into the market.


Technology: One of our biggest overweights is technology, and it’s no wonder. We are in an age where automation is increasing productivity and driving growth even as the labor market remains incredibly tight. Robotics: For the manufacturing that remains, better analytics and just-in-time supply chains reduce the damage from global shocks... 5-year US manufacturing PMI volatility has fallen from 8% in the 80s to <3% today.


Banks: Expect a relatively stable earnings outlook for Banks. Bank valuations saw a meaningful improvement following the Trump election in 2016, and as we see the Fed on hold for the foreseeable future & the yield curve is positively sloped, and given that recession fears have subsided, we believe the EPS outlook has mostly stabilized for now.


With all of this taken into account, our official forecast for US GDP in 2020 is somewhere between 2.5% and 3%, and as such we do not agree with consensus of 1.8%.



What are the Biggest Risks to the Economy?

According to BofA Merrill’s Global Fund Manager Survey, Trade War tops the markets “tail risks”. Trade war concerns topped 33% of FML investors saying it’s the top concern. We believe that this is an unnecessary concern, considering the tariffs that Trump has imposed and negotiated thus far pale in comparison to the Smoot-Hawley tariffs enacted in the early 1930s.


Liquidity: Ahead of the 2020 election, we could see liquidity risk come into play should companies flood the equity supply if they try to list before the election.


The Election: We don’t see this as a headwind for the economy, rather we more see a potential for short-term volatility risk surrounding the 2020 election. While it’s still too early to predict the outcome of the 2020 Presidential Election, any investor uncertainty can create some stomach-churning wobbles in the market.



Taking everything into account, there is nothing on the horizon at present that we believe has the potential to wallop the economy into recession, and we expect 2020 to be another good- to great year in capital markets. We encourage investors to continue staying the course with their current investment plans, and to speak with their investment advisors.







*This content is developed from sources believed to be providing accurate information. The information provided is not written or intended as tax or legal advice and may not be relied on for purposes of avoiding any federal tax penalties. Individuals are encouraged to seek advice from their own tax or legal counsel. Individuals involved in the estate planning process should work with an estate planning team, including their own personal legal or tax counsel. Neither the information presented nor any opinion expressed constitutes a representation by us of a specific investment or the purchase or sale of any securities. Asset allocation and diversification do not ensure a profit or protect against loss in declining markets. This material was developed and produced by Focus Asset Management to provide information on a topic that may be of interest. Copyright 2020 Focus Asset Management.


Sources: BofA Global Research “The RIC Report,” BofA Global Research “Global Fund Manager Survey,” and Bloomberg


TIMESTAMP: 15 January 2020 2:30PM EST

An earlier version of our forecast on our website erroneously stated that we are in-line with the Consensus GDP forecast of 1.8%, while we stated our forecast was between 2.5%-3%. Stating that we were in-line was an editorial error, and we have amended this post accordingly.