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Macro outlook

10 (mostly new) predictions for 2020: A light at the end of a very long tunnel

Robert (Bob) C. Doll
Senior Portfolio Manager & Chief Equity Strategist
Ten predictions - large 10 over blue background

Coronavirus changes everything

We launched our original set of 2020 predictions a few months ago with the theme, “Uncertainties diminish, but markets struggle.” The coronavirus pandemic and resulting economic and market upheaval have since changed everything. In early March, consensus expectations for 2020 global GDP growth were +3%. Now they are -3%.1 A 6% swing would be unusual over a three-year time period. We just saw one in a month. We’re going to continue keeping track of (and scoring) our original predictions through the rest of 2020, but in the interest of providing investors with an updated and more relevant perspective, we’re also offering a mostly new list that speaks to what investors might expect from here.

Original 2020 Predictions


Uncertainties diminish, but markets struggle

At the start of the year, we expected economic growth to pick up modestly and were encouraged by seemingly diminishing macro risks, such as trade policy. Conversely, we were concerned by relatively full stock valuations and thought that market gains could be limited following a strong 2019. The unanticipated coronavirus pandemic and resulting economic and market upheaval threw all of this for a loop.

Scorecard for heading in the wrong direction
1. The world avoids recession in 2020 as U.S. GDP grows over 2% and global GDP grows over 3%.
We didn’t quite get to the twelfth year of the expansion. We expected the significant monetary easing enacted in 2019 would translate into decent, if unspectacular, growth in 2020. The outright halt in economic activity, however, pushed the world into a sharp and deep recession.

Scorecard for heading in the wrong direction
2. Inflation and the 10-year U.S. Treasury yield end the year above 2% as the Fed stays on hold through the election.
The yield on the 10-year Treasury plummeted to record lows amid the heart of the crisis in March and now remains comfortably below 1%.1 Inflation is also in check (but could climb once economic growth starts to recover). For its part, the Fed cut rates to zero and launched a range of new tools to help inject liquidity in the markets.

Scorecard for heading in the right direction
3. Earnings fall short of expectations, partially due to rising wage rates.
Going into 2020, we thought earnings expectations for 2020 were too high. While they have since come down, it was not for the reasons we expected, and it is hard to imagine wages rising any time soon. At the start of the year, the bottom-up consensus for S&P 500 earnings per share was $177.2 That has since come down to $159, and we expect that number will continue to fall sharply.2

Scorecard for heading in the right direction
4. Stocks, bonds and cash all return less than 5% for only the fourth time in 25 years.
This happened in 2005, 2015 and 2018.1 At the start of the year, we thought expensive stock valuations and rising interest rates would hold back stocks, bonds and cash. It hasn’t quite worked out the way we thought, but all three are below 5% on a year-to-date basis.1

Scorecard for too early to call
5. Non-U.S. stocks outpace U.S. stocks as the dollar retreats.
This prediction was originally predicated on our view that the U.S. dollar would fall and that 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. The S&P 500 Index is down -19.6% for the year compared to -23.2% for the MSCI World (ex U.S. Index).1 This could still change if the dollar weakens and if growth recovers.

Scorecard for heading in the wrong direction

As markets recover, we think value styles and cyclical sectors could experience a bounce.”

6. Value and cyclicals outperform growth and defensive stocks.
This one is in a similar state as Prediction 5. As of now, the Russell 1000 Value Index (-26.7%) is trailing the Russell 1000 Growth Index (-14.1%), and cyclical sectors (-26.3%) are behind growth sectors (-14.5%).1 As markets recover, though, we think those trends are likely to shift.

Scorecard for too early to call
7. Financials, technology and health care outperform utilities, real estate and consumer discretionary.
This one is actually pretty close as a basket of our more-favored sectors is down -18.8% and a basket of our least-favored is down -17.3%.1 We continue to think that financials, technology and health care have attractive fundamentals, and wouldn’t be surprised to see this one finish in the correct category by the end of the year.

Scorecard for heading in the right direction
8. Active equity managers outperform their indexes for the first time in a decade.
It may surprise some, but 59% of large cap U.S. managers beat their indexes in the first quarter despite (or perhaps because of) all of the volatility.3 And we think opportunities for active management from here are relatively high.

Scorecard for heading in the right direction
9. The cold wars within the U.S. and between the U.S. and China continue.
Sadly, this one is proving to be correct. An optimist would hope that Americans would use this time of crisis to pull together, but the opposite seems to be the case. And the relationship between the U.S. and China appears to be deteriorating.

Scorecard for too early to call
10. The U.S. concludes a tumultuous political year with a status quo election.
This prediction was originally based on the notion that President Trump would benefit from a lack of a recession and the fact that he didn’t have a significant challenger from within his own party. The “no recession” aspect didn’t happen, and at this point the political environment is tough to handicap.

Ten (mostly new) predictions for 2020


A light at the end of a very long tunnel

Our new-ish set of predictions track the same themes as our original (and a handful are unchanged). Our views for the rest of the year are predicated on our expectation that the coronavirus pandemic will peak in the second quarter, paving the way for a slow economic recovery in the second half of the year. We also think the massive policy stimulus should aid the recovery.

1. The U.S. and world experience a sharp, but reasonably short recession with noticeable recovery before year-end.
Given that economic activity has essentially slowed to a halt, we expect to see the sharpest decline in U.S. and global growth that we have ever seen. But because the recession did not come about from fundamental or structural problems, it should be short, even if the recovery takes time.

2. All-time low yields move higher during the second half, with the 10-year Treasury closing the year above 1%.
As economic growth starts to improve and as investors move back into risk assets, we think bond yields will rise modestly. Should the yield on the 10-year climb over 1%, that would be a sign that the economy is reaccelerating.

3. Earnings collapse, but rise smartly by the fourth quarter.
Our best guess is that earnings will be down 15% in the first quarter and down 50% in the second quarter. The third quarter could still be rough and be down around 20%. But we’d expect earnings to improve to flat in the fourth quarter. Much will depend on how quickly we see the virus come under control.

4. Stocks, bonds and cash all return less than 5% for only the fourth time in 25 years.
We’re not changing the wording of this prediction, but the background has certainly shifted. The stock part of this prediction is (sadly) well under way, and with short-term rates at zero, cash returns should effectively be flat. The wildcard is bonds. If rates start to rise as we expect, returns there will be limited as well.

5. The dollar weakens as global growth strengthens in the second half.
The dollar did start to weaken at the end of last year and at the start of 2020 before the aggressive flight to quality pushed it sharply higher. We expect improving global growth will put downward pressure on the dollar in the second half of this year. Massive U.S. deficits will also act as a drag.

We expect continued tailwinds for active management over the course of 2020.”


6. Value and cyclicals outperform growth and defensive stocks in the second half.
This is a similar prediction to our original one, but with a delayed start. As with several of our new predictions, this one is predicated on the notion that global growth will improve later in the year, which should help value and cyclicals. Both are also showing significantly better relative value than they did at the start of the year.

7. Financials, technology and health care outperform utilities, energy and materials in the second half.
We think both technology and health care should see relatively resilient earnings this year (at least compared to other sectors). And we think financials have strong balance sheets, and are relatively inexpensive. Utilities are unlikely to do well unless the economy remains in a longer recession, while energy and materials are likely to be hurt by lower oil prices.

8. Active equity managers outperform their indexes for the first time in a decade.
We’re sticking with this one. 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 that will happen in the second half of 2020.

9. The cold wars within the U.S. and between the U.S. and China continue.
This is another one that hasn’t changed. Political and social divisions within the United States appear to have worsened since the start of the crisis. And although the focus has shifted away from trade policies, hostility between the U.S. and China has also risen. We don’t think that will change.

10. The coronavirus recession and rise in unemployment cause Donald Trump to be a one-term president.
We’re conflicted about this one. At present, the PredictIt forecasting market is starting to tilt the November results more toward the Democrats’ favor. But Joe Biden doesn’t seem like a particularly strong candidate. We think the odds are slightly working against the incumbent.
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Sources
1 Bloomberg, FactSet and Morningstar Direct
2 Credit Suisse
3 Bank of America Merrill Lynch

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Glossary
The S&P 500® Index is a capitalization-weighted index of 500 stocks designed to measure the performance of the broad domestic economy. The Dow Jones Industrial Average is a price-weighted average of 30 significant stocks traded on the New York Stock Exchange and the Nasdaq. The Nasdaq Composite is a stock market index of the common stocks and similar securities listed on the NASDAQ stock market. The Russell 2000® Index measures the performance of approximately 2,000 small cap companies in the Russell 3000 Index, which is made up of 3,000 of the biggest U.S. stocks. Euro Stoxx 50 is an index of 50 of the largest and most liquid stocks of companies in the eurozone. FTSE 100 Index is a capitalization-weighted index of the 100 most highly capitalized companies traded on the London Stock Exchange. Deutsche Borse AG German Stock Index (DAX Index) is a total return index of 30 selected German blue chip stocks traded on the Frankfurt Stock Exchange. Nikkei 225 Index is a price-weighted average of 225 top-rated Japanese companies listed in the First Section of the Tokyo Stock Exchange. Hong Kong Hang Seng Index is a free-float capitalization-weighted index of a selection of companies from the Stock Exchange of Hong Kong. Shanghai Stock Exchange Composite is a capitalization-weighted index that tracks the daily price performance of all A-shares and B-shares listed on the Shanghai Stock Exchange. The MSCI World Index ex-U.S. is a free float-adjusted market capitalization-weighted index that is designed to measure the equity market performance of developed markets minus the United States. The MSCI Emerging Markets Index is a free float-adjusted market capitalization index that is designed to measure equity market performance of emerging markets. Bloomberg Barclays U.S. Aggregate Bond Index covers the U.S. investment grade fixed rate bond market. The BofA Merrill Lynch 3-Month U.S. Treasury Bill Index is an unmanaged market index of U.S. Treasury securities maturing in 90 days that assumes reinvestment of all income. The Russell 1000® Value Index measures the performance of those Russell 1000 companies with lower price-to-book ratios and lower forecasted growth values. The Russell 1000® Growth Index measures the performance of those Russell 1000 companies with higher price-to-book ratios and higher forecasted growth values.

A word on risk
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