Pro Perspectives 1/6/20

January 6, 2020

Happy New Year!  This time last year, we were talking about the prospects for a huge year for stocks, on the thesis that the Fed would be forced to reverse course on monetary policy, unleashing another 1995-like melt-UP in asset prices.  We had it.

What should we expect for 2020?  More of the same.

Remember, that mid 90s flip-flop from the Fed, laid the ground work for a boom in the economy and in the stock market into the late 90s.

We enter 2020 with an economy that has run at sub-par pace for the past decade, and now we have the fundamentals in place, and catalysts in line to unleash above trend growth (perhaps several years of above trend growth).  That scenario has not been priced into markets.  That means positive surprises in growth and earnings can be among the biggest themes this year.

Among the other major themes at work that give us the chance to see above trend growth this year: 1) the introduction of 5G (this will make wireless internet ubiquitous, connecting nearly everything we do and own to the internet – the impact of which has been compared to the widespread adoption of electricity), 2) a reduction of tariffs and the visibility of an end to the trade war, and 3) global fiscal stimulus (likely to include progress toward a big U.S. infrastructure spend).

This looks like an economic-boom cocktail.  In fact, it looks a lot like the periods that bookended the Great Depression: the Roaring twenties (fueled by fiscal stimulus and innovation – like the automobile and the pervasive access to electricity) and the late 30s (fueled by reduction in tariffs, a big government spending/pulic works programs, and later, war spending).

On the latter, remember back in September, when Iran attacked Saudi oil supply, we talked about the prospects of war – and the way oil prices, gold and stocks behaved in the early 2000’s when the U.S. invaded Iraq. Let’s take a look at an excerpt from that September 16th note:

“We have a shock to global oil supply, and that has some predicting much higher oil prices… 

But I suspect we’ll see oil prices, first, go the other way. 

This all looks like the timeline is setting up for a rate cut, a cut-down China deal, and then the U.S. greenlighting an attack on Iran

What happened to oil prices when we invaded Iraq in 2003.  Prices first went down, big. 

Here’s a look at the 2003-2004 crude oil chart  …

What went up on the Iraq war catalyst?  

Gold went up 25% over the next year …

And stocks went up 45% over the next year …

I suspect we’ve already seen the first down-leg for oil, following the September provocation.  The path from here is probably up, big.