Dare I go out on a limb? Dare I dust off the crystal ball for yet another try at foreseeing the future? Dare I open myself up to the slings and arrows of either being right or wrong, or a little bit of both? My good judgement tells me no, but the little devil on my shoulder is saying, “Do it, do it.” Eh, why not?
Let’s start off with an easier one. Interest rates. First off, rates can’t drop much further. And I don’t see negative interest rates in the U.S., because the world looks to us as a safe haven for money, and investors will demand some return that is positive. The economy is still doing OK, albeit slowing some. But if it maintains a 2% growth rate in 2020, the Fed should be able to keep rates where they are now. A trade deal with China could give a boost to the economy, but probably not enough of one that would wake up inflation and cause the Fed to raise rates significantly. So, I think interest rates will remain pretty much where they are now in the coming year.
Let’s talk about a trade deal with China for a moment. The further we go into next year without one, the greater chance we have of not getting one until after the election. If I were China, I’d be wanting to wait and see what happens in November to see who I’m dealing with beginning January 2021. If the current administration gets re-elected, then your no worse off than you are now. If you get a new administration, then waiting to strike a deal may mean you get better terms. And if a deal is reached, will the “do nothing” Congress ratify it? What will the make up of the “do nothing” Congress look like after November? I say no deal with China on trade in 2020.
After such a long period of economic growth, can the economy avoid a recession in 2020? Initially, it would look like a reasonable bet. Unemployment is very low and wages are rising some, so it would stand to reason that more people would have money to spend and consumer spending is the main driver of our economy. Couple that with interest rates that remain below historical averages, and you would think that the economy would boom again next year. But we’re already seeing a slowdown in the auto industry as well as the housing industry. Increased prices on raw materials due to the trade tariffs are certainly contributing to that slowdown. Another disturbing trend is consumer debt. In June 2019 it totaled $4.1 trillion. The highest its ever been to that point. Of that, $3.03 trillion was non revolving consumer debt which primarily consists of education loans and auto loans.1 If the average consumer has student loans, an auto loan, and rent or a mortgage, how much discretionary income is left? Most economists are suggesting we might skate through another year without a recession and I think I will ride their horse on this one.
So, now you ask, “What about the stock market in 2020?” If the economy stays out of recession and companies continue to make profits, then stocks should be able to show some gains. The wild card in this however, is investor sentiment, and that’s almost impossible to predict. Stock prices do need to take a breather as evidenced by price to earnings ratios. The current P/E ratio of the S&P 500 is 24.18.2 High by historical standards. There will be a lot of noise coming out of the media in 2020 with the election, possible impeachment of the president, ongoing trade wars and who knows what else. I think that investor sentiment could go quite negative quickly. Having such a good run for the past ten years, a little bit of bad news could set off a stampede of investors taking their profits and heading for the sidelines. Right now, I’m neutral on stocks in 2020. In order for stocks to move higher, corporate earnings have to improve and I don’t see that happening. I think the greater probability is a move down, caused by some outside event.
For 35 years now, I’ve been gazing into this crystal ball in hopes of seeing what the future holds and in 35 years, I haven’t seen a darn thing from it. I’m wondering if I drilled some holes in it if it would make a good bowling ball.
1https://www.thebalance.com/consumer-debt-statistics-causes-and-impact-3305704
2https://www.multpl.com/s-p-500-pe-ratio
These are the opinions of Mike Berry and not necessarily those of Cambridge, are for informational purposes only, and should not be construed or acted upon as individualized investment advice.
Mike Berry is a Registered Representative offering securities through Cambridge Investment Research, Inc., a Broker/Dealer, Member FINRA/SIPC. Investment Advisor Representative, Cambridge Investment Research Advisors, Inc., a Registered Investment Advisor. Legacy Wealth Management, LLC and Cambridge are not affiliated. Cambridge does not offer tax advice.
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