2020 Outlook:
• Key economic risks include a still-troubled trade and manufacturing backdrop. But we see no signs that the U.S. or global economies will slip into recession.
• Stock prices may have come too far, too quickly. Unless economic growth and corporate earnings results are stronger than we anticipate, we think markets might struggle.
• As a result, we think nimbleness, flexibility and selectivity will be required for investors to meet their objectives.
As 2019 unwinds (and before we unveil our 2020 Predictions), it’s a good time to look back at the past 12 months and provide initial thoughts about what the next year might bring. The year started with a strong reversal of the sharp selloff that ended 2018. Despite some volatility and road bumps, 2019 proved to be an incredibly strong year for financial markets, and stocks are closing the year near record highs. We don’t expect the current cycle to end in 2020, but we also don’t believe markets will match this year’s lofty results.
Choppy and frustrating, but no recession
We based our 2019 predictions around the theme that markets and economic data would be choppy, but we would avoid a recession or an end to the bull market. That was pretty much the case, and with only a few trading days left in the year, most of our predictions should come to pass.
Prediction 1
The U.S. expansion becomes the longest in history despite GDP slowing to a still-above-trend increase of 2% to 2.5%.
Growth slowed slightly in 2019, but the final data will likely show that the U.S. grew at just over 2% for the year. And as of June 30, this current economic expansion became the longest in U.S. history.2
Prediction 2
Unemployment bottoms in 2019 while wage growth continues to rise.
The last reading available showed unemployment at 3.5%, close to a 50-year low.3 Wage growth has also continued to accelerate. We are starting to see some preliminary signs of higher inflation, which will be something to watch in 2020.
Prediction 3
The Treasury yield curve flattens and credit spreads widen due to late cycle concerns.
Bond markets have been quite volatile in 2019, causing this prediction to fall into the half-correct category. The yield curve has been inverting on-and-off and flattened during 2019, while credit spreads have tightened along with rising stock prices.
Prediction 4
Corporate earnings growth estimates weaken for 2019 and 2020, as both revenue and profit pressures rise.
Both revenues and profits have come under pressure this year, causing earnings growth expectations for 2019 and 2020 to fall. As we look into next year we are concerned that corporate earnings expectations may still be too high, setting up the possibility of disappointments.
Prediction 5
U.S. equities experience a positive return, but fail to reach record highs for the first time in 10 years.
We’ll also wind up getting this one half-correct. Stocks soared higher for the year, setting new records. As of this writing, the S&P 500 Index is up 31.1%.
Prediction 6
Non-U.S. stocks outperform U.S. stocks as the dollar sags.
This looks to be the sole prediction we are getting wrong. Non-U.S. growth has been slower than we expected, and the U.S. dollar has risen. As of the end of last week, the S&P 500 Index (up 31.1%) is well ahead of the MSCI World Index ex-U.S. (up 22.5%).
Prediction 7
The information technology, financial and health care sectors outperform utilities, REITs and materials.
We were getting this one wrong for most of the year, but a sharp rotation to cyclical areas of the market in the fourth quarter helped push this one to the correct category. As of now, a basket of our preferred sectors is up an average of 33.9% while a basket of our less-preferred is up 25.6%.
Prediction 8
The annual federal budget deficit approaches $1 trillion, a level unprecedented absent a recession.
Lower taxes and increased spending pushed the deficit to levels never seen in non-recessionary years. For the fiscal year ending September 30, the Congressional Budget Office reported a deficit of over $1 trillion. Estimates for the coming years are climbing even higher.
Prediction 9
U.S. and global politics spark more market volatility as the cold wars within the U.S. and with China persist.
Trade issues, Brexit worries, geopolitical hotspots and growing political and social discord have all been causing market volatility. And sadly we don’t see that backdrop fading any time soon.
Prediction 10
A double-digit number of Democrats run for president while President Trump is challenged within his own party.
Before some marginal candidates started dropping out, well over 20 Democrats announced runs for the presidency. And at this point, Mark Sanford, Joe Walsh and Bill Weld have announced for the GOP. Add in the escalating drama of the impeachment hearings, and politics certainly aren’t boring. And all of that before things really heat up in an election year.
Robert Doll is chief equity strategist and senior portfolio manager at Nuveen.