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Turned out that 2019 was a pretty good year for the U.S. economy and a great one for stocks. The S&P 500 was up 28.9% while the Nasdaq Composite Index COMP, +1.33% surged 35.2%, their biggest annual gains since 2013.
Don’t expect history to repeat, although three of the last four times the S&P 500 SPX, +0.84% gained 20% one year, a smaller, double-digit gain was posted in the following year.
But as optimism reaches new highs — a recent University of Michigan survey showed Americans’ confidence they’ll have adequate income in retirement at a 20-year high, while CNN Money’s Fear & Greed Index hit 96 out of 100, “extreme greed” (at this time last year it was 12, “extreme fear”) — I hesitate to throw more logs on the bullish fire.
In truth, stocks appear ripe for a correction, though I don’t see anything that would stop the economic expansion or bull market for good. Anything, that is, except politics, which could be a huge wild card in this presidential election year.
First, here’s what I see for the U.S. economy and markets in 2020:
1. No recession: There will be no recession this year to drive President Donald Trump out of office, thanks to efforts by the president himself to tamp down the trade war he started with China; budgetary pump-priming (at just the wrong time, in my view), and a neutral-to-accommodating Federal Reserve and other central banks. The much-hyped inverted yield curve, when the yield on the two-year Treasury briefly exceeded that of the 10-year, will prove to be a false signal. U.S. GDP growth will stay north of 2%, with surprises more likely to the upside.
2. The Fed stays on the sidelines: A year ago, Fed Chairman Jerome Powell learned who was really his boss — stock market investors. When the Fed raised interest rates and unwound hundreds of billions of dollars of quantitative easing, investors went on a buying strike, and stocks fell by almost 20%, the technical definition of a bear market, by Christmas Eve 2018. President Trump predictably threw a Twitter tantrum, demanding rate cuts. Powell then caved to both the markets and the president, all the while proclaiming the Fed’s “independence.”
In the growing U.S. economy of 2019, the Fed cut the federal funds rate three times, so it now sits at a historically minuscule 1.5%-1.75%. Meanwhile, the Fed’s activities in the “repo” market have added more than $200 billion back to its balance sheet, which it reduced by about $700 billion from January 2018 through last September. The central bank will stay on the sidelines in the 2020 presidential election year, and balance sheet tightening is over for now, too — good news for the economy and stocks. Other global central banks also will pursue easy money policies.
3. No “Phase 2” trade agreement with China, but no big trade wars, either: With President Trump, what you see is what you get, and what we’ve got, in the so-called “Phase 1” trade deal with China, is no structural reform or even specific commitments by China to purchase U.S. goods. In short, this is a lot of sound and fury, signifying little. The president will declare a great victory and his supporters will cheer him on, because the appearance of victory is all that matters (see North Korea). What Trump really cares about is that the economy and stock market keep rising in his re-election year.
4. Stocks will hit new highs, but a correction looms: The year before a presidential election is typically the best of the four-year cycle, and presidential election years can be pretty good, too. But this year, with two far-left candidates — Senators Bernie Sanders and Elizabeth Warren — making a good run at the Democratic nomination, there’s much more room for uncertainty and volatility. And though earnings growth isn’t great and P/E multiples are getting rich, a strong economy and accommodative Fed should push stocks higher before something — who knows what? — prompts a correction.
5. The winner of the U.S. presidential election will be: That depends on the Democratic nominee. According to Nate Cohn of The New York Times and David Wasserman of the Cook Political Report, a Democratic candidate could win the popular vote by five percentage points or five million votes and still lose the Electoral College. This bizarre, archaic system, which no other democracy in the world has emulated, means the election probably will be decided in Michigan, Wisconsin, Pennsylvania, Florida, and Arizona.
Some polls suggest a ticket headed by either Warren or Sanders will have trouble winning those states, but one with former Vice-President Joe Biden on top might prove otherwise. A lot would depend on Biden’s vice-presidential choice: Senators Kamala Harris or Amy Klobuchar would probably help the ticket among key constituencies, but — here’s a trigger warning, progressives — Stacey Abrams, who has never won statewide office and is untested on the national stage, would be a loser, I believe. In this year’s election, I see Democrats keep the House and gaining some seats in the Senate, which could wind up in a 50-50 split.
With unemployment at 3.5% and robust consumer confidence, this election should be a cakewalk for the president. But Trump is Trump — more than half of Americans disapprove of his performance, while the country is split evenly on his removal from office, so this race will be suspenseful for both American voters and investors. That’s why this year especially, predictions essentially will be worth the paper they’re printed on.
Howard R. Gold is a MarketWatch columnist. Follow him on Twitter @howardrgold.
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