“Those who have knowledge, don’t predict. Those who predict, don’t have knowledge.” – Lao Tzu, 6th Century BC Chinese Poet
“Nuclear-powered vacuum cleaners will probably be a reality in 10 years.” – Alex Lewyt, president of Lewyt vacuum company Corp., 1955.
History has amply demonstrated that economic forecasting is a fool’s errand. With that admonition in mind, here are a few predictions for 2020.
The US Economy. Since emerging from the depths of the Great Recession in 2009, the American economy has demonstrated moderate but steady growth at a sustainable, non-inflationary pace that has now eclipsed the longest previous expansion in history. Expect growth to continue well into next year at a more subdued annual growth rate of between 1.5 and 2.0 percent. Recession fears that escalated last fall have receded for now on strength in retail spending, high consumer confidence and a mild resurgence in homebuilding. Slowing auto sales and declining freight and rail shipments augur a likely deceleration in the second half of 2020. Watch for the Fed to cut rates again should any signs of weakening emerge.
Unemployment, already at a 50 year low, should remain near 3.5% through the first half of the year. Most of the new jobs created in the economy will be filled by workers choosing to reenter the labor force (not counted as unemployed if they were not actively seeking a job). Wages should climb modestly at 3-3.5%, ahead of an expected inflation rate of 2-2.5% and translating into somewhat greater purchasing power.
Risks to the outlook include international slowdown and debt overload. The marked decline in Chinese growth in particular and Asia in general, coupled with economic threat from the exit of the UK from the European Union pose a contagion risk to US prospects. A reasonable expectation is a gradual walking back from the brink of a destructive trade war; early evidence from a preliminary agreement with China are encouraging if not dramatic and could retard the pace of the global slowdown.
Meanwhile the US national debt will exceed $24 trillion or 107% of GDP in 2020, while annual budget deficits will top $1 trillion per year well into the future. One potential risk is the destabilization of global bond markets if foreign investors get spooked by US profligacy. But of course that prediction has failed to materialize for at least the past 10 years.
Stock Market. As the legendry economist Paul Samuelson said, the stock market has predicted 9 of the last 5 recessions, and virtually no one expected the S&P 500 to rally by 30% in 2019, so any forecast for 2020 is inherently fraught. Given the current high valuation of US stocks and modest expectations for profit growth, some sort of pullback or at least stasis seems like a high probability, allowing corporate earnings to catch up with stock prices. As a baseline, mid to high single digit returns in 2020 would be a good starting point, assuming that recession does not emerge later in the year. Prudent long-term investors would do well to rebalance portfolios back to target allocations in order to mitigate against the risk of a sharp correction. As always, timing is impossible and exposure to equities should depend upon a sufficient time horizon.
Political risks to the market outlook cannot be ignored completely, but all too often prognosticators factor politics too heavily into the environment for stocks. Markets react in the short run to news flow, but eventually respond more to changes in underlying fundamentals like sales growth, profitability and cash flows.
Submitted in the spirit of author Robert Caro: “My predictions are notably inaccurate.”
Christopher A. Hopkins, CFA