10 predictions for 2020: Q4 update
A look at our old and new predictionsIt seems like a lifetime ago when we offered up our usual annual set of 10 Predictions in January. At the time, we expected the economic expansion still had some life left. The coronavirus pandemic and resulting economic and market upheaval changed everything. Amid the height of a new bear market and sharp recession in April, we recast our predictions to provide investors with some new perspective about where things might be heading. We will continue tracking (and scoring) both our original and newer predictions through the rest of 2020. At this point, we think markets are facing some near-term risks, but our longer-term view is more positive.
A light at the end of a very long tunnel
1. Original: The world avoids recession in 2020 as U.S. GDP grows over 2% and global GDP grows over 3%.
Update: The U.S. and world experience a sharp, but reasonably short recession with noticeable recovery before year-end.We didn’t quite get to the twelfth year of the expansion, as the outright halt in economic activity pushed the world into a sharp and deep recession. At this point, it is safe to say that the deepest recession in post-World War II history has also been the shortest one. Third quarter GDP growth could come in close to or over 30% following the intensely sharp contraction in the spring.
2. Original: Inflation and the 10-year U.S. Treasury yield end the year above 2% as the Fed stays on hold through the election.
Update: All-time low yields move higher during the second half, with the 10-year Treasury closing the year above 1%.
The 10-year Treasury yield plummeted to record lows during the heart of the crisis in March, and has since been moving in fits and starts. The yield did approach 0.9% in the second quarter before falling again and hovering around 0.6% to 0.7%. As economic growth improves and investors move back into risk assets, we think bond yields will rise modestly. But it’s looking like a long shot that the 10- year yield moves to over 1% this year.
Until a medical breakthrough allows the economy to enter a self-reinforcing expansion, ongoing stimulus is still needed.”
3. Original: Earnings fall short of expectations, partially due to rising wage rates.
Update: Earnings collapse, but rise smartly by the fourth quarter.
Going into 2020, we thought earnings expectations for 2020 were too high. Expectations then collapsed, although obviously not for the original reasons we anticipated. Third quarter earnings are on track for a rebound, and fourth quarter results could potentially be even better. Critically, we are expecting a notable dispersion between sectors and industries, with areas like technology and health care likely to outperform those hit hard by economic closures.
4. Stocks, bonds and cash all return less than 5% for only the fourth time in 25 years.
This is one of the three predictions we left unchanged. Markets experienced this phenomenon in 2005, 2015 and 2018. Stock prices soared higher through the summer, and survived a setback in September to remain in positive territory (up 5.6% for the year). With the Fed anchoring short-term rates at zero, cash returns have been miniscule. Bonds are performing better than we expected (The Bloomberg Barclays U.S. Aggregate Bond Index is up 6.8%), but that could change if longer-term yields rise.
5. Original: Non-U.S. stocks outpace U.S. stocks as the dollar retreats.
Update: The dollar weakens as global growth strengthens in the second half.
This prediction was originally based on our view that the U.S. dollar would fall and non-U.S. stocks offered better relative valuations. During the crisis, however, non-U.S. stocks were hit even harder than their U.S. counterparts and have not recovered as quickly. The value of the dollar has been falling since the crisis began and may have approached oversold conditions. Massive U.S. deficits will also drag on the dollar over the long term.
Stocks are likely to remain choppy and range-bound for the next several months, pointing to the importance of investment selectivity.”
6. Original: Value and cyclicals outperform growth and defensive stocks.
Update: Value and cyclicals outperform growth and defensive stocks in the second half.
As of now, the Russell 1000 Value Index (-11.6%) is significantly trailing the Russell 1000 Growth Index (+24.3%) for the year, and value is also lagging so far in the second half of 2020. The cyclical/ defensive situation is mixed: An equal-weighted basket of each are both down just under 1% for the year, while cyclicals (+6.6%) are slightly ahead of defensive stocks (+6.1%) in the third quarter.
7. Original: Financials, technology and health care outperform utilities, real estate and consumer discretionary.
Update: Financials, technology and health care outperform utilities, energy and materials in the second half.
For our original prediction, a basket of financials, technology and health care is up 4.5%, while a combination of utilities, real estate and consumer discretionary is trailing at 3.6%. Regarding our revised prediction, our list of favored asset classes is up 7.4% in the third quarter, and a basket of our least-favored asset classes was flat. Technology and health care should continue to do well in an environment of quantitative easing, and the financial sector appears undervalued.
8. Active equity managers outperform their indexes for the first time in a decade.
This is the second of our predictions that did not change. Active managers outperformed for most of this year, before trailing during the sharp rise in stocks in the spring and early summer. As of the end of the third quarter, 40% of large cap active managers are ahead of their benchmarks, per Bank of America Merrill Lynch. We think opportunities for active management from here are relatively high. In our experience, active managers generally have a tailwind when small stocks beat big stocks, non-U.S. stocks outperform, equity returns are relatively low, value beats growth, correlations are low, economic growth improves and interest rates rise. We think most of these scenarios will play out in the coming months.
9. The cold wars within the U.S. and between the U.S. and China continue.
This is our third unchanged prediction. And, sadly, it is proving to be correct. An optimist would hope that Americans would have used this time of crisis to pull together, but the opposite is the case as political and social divisions within the United States have worsened through 2020. And the relationship between the U.S. and China (and, indeed, China and the rest of the world) appears to be deteriorating as the countries move from being competitors to adversaries.
While near-term risks for stocks remain elevated, we also believe global equity prices will be higher one year from now.”
10. Original: The U.S. concludes a tumultuous political year with a status quo election.
Update: The coronavirus recession and rise in unemployment cause Donald Trump to be a one-term president.
President Trump’s popularity and poll numbers have been dropping and the possibilities of a Democratic sweep of the White House and Congress are growing. As 2016 showed us, however, election surprises can’t be ruled out. Should a sweep occur, it would represent a substantial change in the government’s tax and regulatory policies that could significantly impact financial markets.
All market data from Bloomberg, FactSet and Morningstar Direct
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A word on risk
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