Carrie and I have developed a fondness for Thai and Indian cuisines, to the detriment of our Chinese food consumption. For most of our married years, Chinese takeout had been a comfort food staple, but no longer. I do, however, slightly miss the fortune cookie, not for the cheesy adages inside but as a light palate-cleansing dessert.
Carrie, on the other hand, has no use for the cookie as food but rather is entertained by the “sage” advice offered on the paper slip. My plan was to Google several funny fortune cookie sayings to spruce up our blog, but they’re just universally bad. I did find one worthwhile: “Help, I’m being held prisoner in a Chinese bakery” – made me giggle.
Recall in our 2019 outlook blog this time last year, we were feeling supremely confident about the prospects for a strong stock market in 2019. That confidence was stoked by the weird bear market that transpired in late 2018, unhinged from the economics at the time. Our expectation played out – in spades.
A key catalyst for the stellar 2019 market performance was the Fed Reserve’s major course reversal in early ’19 to stop their monetary tightening policy in its tracks. Tight monetary policy had spooked investors in 4Q18 and the move provided thrust to propel stocks to new record highs. Economic growth in ‘19 was okay – not great – but the shopping consumer negated sluggish corporate investment from the US-China trade standoff and staved off investor recession worries.
As for 2020, a fortune cookie may offer an equally useful forecast as a well-researched wealth management outlook blog. The cookie theme might read “Enjoy yourself while you can”.
Why? Well, how in dadgum can you top 2019, which posted one of the best investment performance years in memory across nearly every asset class. Unlike 2018, when you couldn’t find an asset class with a positive return, investments across the asset and geography spectrum posted outstanding positive returns in 2019.
And, importantly, we’re still in the middle of the most abnormal market cycle in world history where markets trade higher based on momentum, foreign capital flows and central bank liquidity.
Below is our take on the investment landscape heading into 2020:
- Over ten trillion dollars of foreign government debt still carry negative yields! That number was down in 2019, but it’s still staggeringly high. The upshot is that negative yielding debt sucks large amount of foreign capital into US stock and bond markets, further enlarging US stock and bond market bubbles.
- Organic corporate earnings growth in 2019 was anemic. As was feared, corporations are pocketing their large 2018 income tax cut and not reinvesting the tax savings into their businesses. This is manipulating corporate profits per share and masking rather weak business growth. Even with buybacks, we only see mid-single digit corporate profit growth in 2020.
- The US – China trade game is not over; it’s only the end of the first quarter. Fortunately, the trade standoff, which could have caused a business recession in 2020 is now in timeout. Both countries were getting creamed by the trade impasse and prudently signaled that some form of a trade deal would get done and a full-on tariff war delayed. The “phase 1” deal now in force is small-ball and didn’t fix any fundamental bi-lateral trade imbalances, but it hopefully will bring some critical relief to struggling US farmers. This remains a material risk for investors in 2020.
- The US consumer has been the true bulwark that forestalled all the recession worry for 2020. While the US unemployment rate is the best in decades, the labor participation rate is not improving enough to accelerate growth higher than a 2% real GDP run rate. There remains a serious job skills gap leaving many well-paying jobs unfilled and curbing economic growth.
- US fiscal deficits and our national debt continue to pile up at such a high rate it seems fictional. I guess deficits and debt won’t matter to investors – until they do.
- The elephant (or donkey) in the room is the 2020 presidential election. The Democrats are seriously considering nominating two candidates who openly talk about 100% tax rates on the wealthy and making big tech companies regulated utilities. Never thought I’d live to see socialism becoming cool in the US.
- US leading economic indicators are flashing yellow. However, a recession does not appear to be in the cards for 2020 due to ongoing robust consumer spending, election politics and the recent trade war truce.
- Corporate debt sits at record highs relative to the US economy. A meaningful number of publicly traded small and mid-sized companies are losing money. Don’t confuse a stock market rally with a booming economy.
- US bonds still trade at levels normally associated with a economic depression and the US dollar seems materially overvalued across the globe. The good news is the yield curve is positively sloped and thus not signaling recession in 2020. However, it won’t take much upward movement in interest rates for bond investors to give back the robust capital gains they earned in 2019. Frankly, bonds will be essentially useless in 2020.
- Global capital markets remain a murky mess. International and emerging markets had a strong hope rally in 2019; their outlook for 2020 will hinge on more economic growth over speculation.
The current stock market run started with good fundamentals then degenerated into emotion and momentum trading by year-end 2019. I recently heard the catchy acronym “TINA market”, which stands for “There Is No Alternative” to owning stocks. An apt concerning description it seems to me.
We continue to preach discipline with your portfolio asset allocation and to keep up the fight against the greed instinct to chase hot stock market returns. Maintaining proper asset allocation is akin to purchasing hazard insurance on your home. It may feel like a useless expense– until an emergency.
In sum, in fortune cookie terms, “you’re living in the most interesting investment times”.
Until next time, be well….Tim