2020: Global Economic Growth: Let it Rip!
It is so disappointing that we look to well-known and trusted organizations like the IMF and OECD to make economic forecasts to guide us when investing when they are invariably wrong most of the time. Same goes for trusting the Fed economic forecasts.
One year ago, the consensus forecast by these experts was that global growth would exceed 3.7% in 2019 and do even better in 2020 only to be lowered by November to growth below 2.8% and 3.2% in 2019 and 2020, respectively. Last week, we discussed how bearish all the market pundits/experts were last December for 2019 while the economic forecasters were optimistic. Both were absolutely wrong! As usual, they were looking in the rear-view mirror rather than over the valley, which is our strength as witnessed by anyone who read our blogs over the last year.
Paix et Prospérité was forecasting by the end of last year a rising U.S. market led by defensive, high yielding stocks while forecasting a slowing economy due to an overly restrictive Fed monetary policy which we were convinced would change by the spring. We also felt that the U.S would outperform all other economies as the consumer was over 75% of our GNP and would remain strong while other global economies were more reliant on production than consumption and would, therefore, suffer in 2019.
As 2019 is now ending and 2020 begins next week, the market pundits/experts have all turned positive, at least for now, on a trading basis, while these well-known economic forecasters have all turned much more negative on future global economic growth.
As you know, we began shifting our view months ago away from global growth would remain sluggish believing that we were nearing/passing an inflection point such that global growth would reaccelerate as we moved into 2020. Our core beliefs were based on: monetary ease would finally begin supporting global economic growth as it normally takes 6+ months to influence an economy; monetary policy would remain accommodative forcing investor further out on the risk curve; trade concerns would ease regardless of a deal with China as we lapped one year of tariffs making year over year comparisons easier while supply chains had enough time to shift out of China to mitigate further risks; some trade deals like the USMCA would be concluded; governments would finally begin major fiscal stimulus (maybe not in the Eurozone) packages (China, Japan and the U.S for sure); Brexit would get resolved one way or another; and finally, Trump would do everything in his power to boost the economy and stock market as he runs for reelection in 2020. Also, investors were over weighted bonds while significantly underweighted equities at just the wrong time.
Let us state categorially that the global economies will pick up steam as we go through 2020 and end the year on a high note as we enter 2021 which will be a good year, too. Why? All of the major monetary bodies (ECB, Fed and BOJ) have announced that they will not raise short rates in 2020 and will not even considering raising rates until inflation is running over 2% for a sustained period of time. Basically, they are all saying “let the global economies rip” in 2020 as their real fears are slow growth and rising deflationary pressures. Each one is signaling to the business community to have confidence in them, providing some certainty, that they will not slow growth in 2020 providing some certainty to the business community as it pertains to their planning capital spending and hiring next year. We can only imagine that 2020 budgets worked up over the last month are already being scrapped/hiked especially after Phase 1 of a trade deal with China has been reached; the USMCA has finally been approved; Johnson won the election in Britain; the U.S government just passed a huge stimulus package along with China and Japan; and Trump’s chances for reelection has risen as the most far left Democrats falter. The markets will not fear Bloomberg or Biden if either were elected as both are really moderates/capitalists even if they seem to support some of agenda of the left now.
The bottom line is that we expect all of the well-known economic forecasters to do a 180 from their declining projections throughout 2019 to raising their global economic forecasts as we move through 2020 with the year ending on high note. We remain convinced that our market has much more upside than generally perceived as earnings forecasts will be boosted too as we go through the year. While are currently forecasting S&P earnings at $170+/share for the year, the run rate could easily be $180/share by the fourth quarter of 2020 with more gains in 2021. As you know, we focus on the 10-year treasury rate plus some financial risk factor to project a market multiple. While we are currently using a 20+ market P/E for 2020, it is based on the 10-year treasury increasing over 50 basis points to 2.50% by the end of next year. The market multiple right now with the 10-year treasury under 2% could easily top 22 times earnings. We are very confident that bank capital/liquidity ratios will continue to increase in 2020, spreads will narrow, and financial risk will remain low by any historical measures.
Finally, we expect inflation to stay contained for years to come as global competitiveness, major technological advancements and the rise of disruptors in every industry will provide a cap on pricing. We are also confident that corporations will stay lean and mean while accelerating capital spending, especially for high return technology projects, that will lead to rising productivity gains more than offsetting higher wages.
The bottom line is that our 3400+ projection for the S&P in 2020 is most likely very conservative if our core beliefs continue to prove to be accurate. While we do expect outperformance for production-based economies like the Emerging markets in 2020, we remain focused on the U.S market as there are far less risks here than we see anywhere else. Notwithstanding, we are fully invested today in our core belief of accelerating global growth by owning global capital goods, industrial and machinery companies; technology emphasizing semis; financials anticipating a rising yield curve; low cost industrial commodity companies (copper stands out); agriculture, and many special situations. We clearly own no bonds and we expect the dollar to weaken as growth accelerates worldwide next year.
All of us at Paix et Prospérité would to wish you a very happy, healthy and prosperous New Year. Thank you all for trusting us and letting us offer our thoughts to you on a weekly basis. We sincerely hope that we made a difference.
Our weekly investment webinar will be held on Monday, December 30th at 8:30 am EST. You can join by simply typing into your browser https://zoom.us/j/9179217852.
Remember to review all the facts; pause, reflect and consider mindset shifts; turn off the pundits/so called experts; look at your asset mix with risk controls; do independent research and…
Paix et Prospérité LLC