Our 2019 outlook forecasted a year of growth with some rockiness along the way. Looking back, it’s clear 2019 was a strong growth year. It also capped off the first decade in our history without a recession:
Last year was a huge run for the economy overall and some themes for the future are starting to take shape. Here’s what we expect in both the near-term and for this year.
The end of 2019 saw a “Santa Claus rally” in the stock market, which can create the fear of missing out (“FOMO”) for investors and lead to a “January effect,” where stock prices tend to increase. We see five macroeconomic factors that could support early 2020 gains:
- Recent weakness in the U.S. dollar, which presents tailwinds for investors.
- Data from research firm Lipper indicate there is $3.4 trillion in cash and money market accounts, which is up $1 trillion from 2017 – this is fuel for investor FOMO.
- Estimated year-over-year earnings growth for the S&P 500 stands at 9.2 percent, which is above the 10-year average.
- Pensions funds, year-end bonuses, and tax-loss harvesting activity could pump money into markets in January, causing volume to increase.
- Several major upside technical breakouts are taking place that indicate a longer bull market run.
Any of these factors has the potential to move markets upward. When viewed collectively, the potential for early 2020 growth is strong.
We were bullish going into 2019, probably more than most considering the bad effects of 2018’s last quarter. But that bullish expectation turned out to be correct, because as we discussed over and over, Cornerstone bases its strategies around data and fundamentals, which pointed to 2019 growth.
For 2020, we see the S&P 500 growing to somewhere around 3,650, based on our economic analysis. While that may seem overly optimistic to some, we’re only about 12.5 percent away from that right now. Stocks remain cheap given the level of profits and expected earnings growth:
We evaluated two key criteria for our 2020 market estimate.
First, we considered the likelihood of a near-term recession. We don’t see one. The economy is still adapting to lower tax rates and monetary policy remains loose. Additionally, homebuilders are still building, and consumer spending power is strong, so a recession seems unlikely.
Second, and more importantly, we used a capitalized profits model to gauge future growth prospects. It takes the government’s measures of profits from gross domestic product (GDP) report data and divides them by interest rates to determine fair values of stocks. Using this methodology, the current 10-year Treasury yield of 1.85 percent suggests the S&P 500 is grossly undervalued.
We’re forecasting GDP growth of 2.5-3 percent, supported by more home building and business investment than in years past, along with the strong consumer purchasing power already mentioned.
The labor market should remain strong in 2020, with the jobless rate settling somewhere between 3.3-3.5 percent and wage growth continuing. If that happens, it will be the lowest unemployment we’ve seen since the 1950s. We also see payroll growth of 150,000 per month on average.
Inflation-wise, it looks like the consumer price index (CPI) will finish up 2.1 percent in 2019, a slight uptick from 1.9 percent in 2018. We think the CPI will accelerate to about 2.5 percent in 2020.
These are all good signs and they counter a persistent flaw in economic thinking – that a long economic expansion must end because of old age. History and research contradict this theory, with the San Francisco Federal Reserve Bank showing in 2016 that old economic expansions are no more likely than young economic expansions to falter in the next year.
We believe that entrepreneurship and public policy matter the most. This is justified by the fact that the U.S. has gone from one of the largest importers of petroleum to one of the largest net exporters.
Other signs of good things to come include lower cancer rates, the increased values of technological innovation, and perhaps most encouraging, the fact that public policy is inducing growth rather than holding it back. In fact, it could be said 2019 was the best year in human history, which isn’t something you’ll see in the headlines too often.
But there is potential for danger. The biggest risk to a strong 2020 is political, both domestic and geopolitical. We’ll know much more about that when we find out who comes out of the Democratic presidential primary race for the November election. Until then, it’s wait-and-see.
In short, while this economic expansion won’t last forever, we don’t see it ending in 2020.
Securities sold through CoreCap Investments, Inc., a registered broker-dealer and member FINRA/SIPC; advisory services offered by CoreCap Advisors, Inc., a registered investment advisor. Cornerstone Financial and CoreCap are separate and unaffiliated entities.