Here are three possible stock market scenarios for 2020.
The charge of the Bull brigade
Bulls are optimists that charge ahead regardless of possible threats. They have form on their side. Since the end of the global financial meltdown in March 2009, there have been no crashes (a fall in the share market index of over 20% from peak to trough) even though such collapses normally occur every three or four years. Anyone fully exposed to shares since March 2009 has done very well.
Given the slowing economy globally and locally you might wonder why the bulls are so ebullient about the share market’s prospects for 2020. Firstly, unlike most other developed nations, America is enjoying a job’s boom, with only 3.5% unemployment. Secondly, should the economy sour, the greater the chance of monetary and fiscal stimulus, which would boost share prices. That might sound perverse but bulls know that within any year there is no discernible correlation between economic growth and stock price return.
Thirdly, central banks have all agreed that interest rates could fall further and stay low for a long time. That’s an encouraging sign to stock bulls so expect them to keep roaring and charging ahead. It also means that the hurdle rate for investments in future will be lower. That will push up all asset prices (bonds, property, shares and gold) as yields tumble towards zero.
Could this end badly for shareholders? Yes, but until the music stops playing don’t stop dancing. And the music is likely to last through 2020, a US Presidential year, which is normally associated with a strong share market, as the pork barrel is rolled out to win votes.
The Bulls say enjoy the annual Santa Clause rally since it will usher in a year of irrational exuberance, so don’t miss being onboard.
There are Bears out there
Bears are pessimists that retreat to their lairs when danger lurks. The bearish view is that the world (and Australia) is heading for recession and it’s too late for central banks and governments to prevent it. In any event, the underlying cause of the 2008 global financial crisis (a huge debt overhang) was not resolved (by deleveraging), but made worse by increased public and private borrowing stoked by central bank liquidity creation (QE).
The recent negative yield curve, the worsening OECD’s composite leading economic index and the collapse in the surveyed confidence of US CEOs all portend a looming recession.
According to the bears, the slowdown in growth will become more marked in 2020 as Trump tries to decouple the US economy not only from China but also Europe and South America.
American forward earnings per share have been continuously revised down during 2019. Worse still, American corporate profits have stagnated since 2011. Only company share buybacks have driven this bull market, not genuine earnings growth. Trump’s massive corporate tax cut boosted after tax profits, but that adrenalin hit is over.
The gap between the S&P 500 stock index and corporate profits after tax is now wider than it was before the dot.com bust of 2000. History tells us that the stock market can’t grow faster than after tax earnings so a reversion to trend is inevitable. Also, the tenth year of each decade is on average lacklustre for shares.
The Bears say enjoy any Santa rally, because by next Christmas you’ll be crying in your stocking as you count share losses.
And a Wildebeest or two…
Wildebeest migrate in a huge loop and eventually come back to where they started. In stock markets, wildebeest switch between investment markets and styles as they go through cycles.
With world growth slowing and most growth stocks heavily overpriced, the Wildebeest are migrating to value stocks. According to AQR’s Cliff Asness: “excluding the tech bubble, the value of value is the cheapest it’s ever been by a fairly decent margin.”
Funds flow suggest the Wildebeest started shifting out of growth stocks to value stocks in September.
The Wildebeest also foresee a rotation out of stock markets that look overvalued towards those that look undervalued. Standard market valuation measures suggest most developed countries share markets look overvalued, whereas most developing and emerging countries markets look undervalued.
The Wildebeest think now is the time to change Christmas stockings from growth to value shares and from American to Asian and emerging market shares (including possibly Australia).
Conclusion
Market Timing Australia (MTA) doesn’t punt on backing a particular scenario but instead gauges where the market itself says it’s going. For MTA’s recommendations take out a free one month subscription here [1]. You will receive its latest weekly and monthly bulletins, which contain in-depth analysis and specific recommendations to help navigate the share market in both good and bad times.
Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regard to your circumstances.