December 23, 2019
Last year at this time, as we ended 2018 and looked ahead to 2019, it was clear that the dominant theme for the year ahead would be an about-face by the Fed.
Not only have we had it, but global monetary policy is broadly back in an aggressive easing mode. And with that fuel, stocks have had a huge year.
So what will next year look like?
We should expect another big year for stocks.
Let’s revisit the many compelling reasons why we should expect a boom in stocks to continue (and maybe in just the early stages):
1) Global central banks are expanding balance sheets again. The history of the past decades tells us: increased global liquidity equals higher stocks.
2) Massive fiscal stimulus in the U.S. continues to work through the economy – and a $2 trillion infrastructure spend is coming. Japan is launching a huge fiscal stimulus program in 2020 (5% of GDP). Expect the wheels to start turning in Europe to follow the lead of the U.S. and Japan.
3) Seventy percent of GDP comes from consumption. And the consumer is in a very strong position. Unemployment is at record lows. Wages are at 11 year highs. Household net worth is at record levels. Consumer credit worthiness is at record levels. The amount of money required for consumers to service debt every month, relative to their disposable income, is near record lows (debt service ratio). And companies are producing record profits.
4) With a fundamentally strong economy, Trump has been in the driver’s seat to force structural reform. And he’s done it (and continues to do it). Don’t underestimate the value of dealing with global imbalances (i.e. trade imbalances that ultimately led to the global credit bubble and burst). Stopping the global transfer of wealth to China is at the core of it. Any movement is a win, and he’s gotten movement, and he’s changed the global perception of China’s role in the global economy.
5) The above all argues for an economic boom period. Remember, we never had the big bounce back in growth, following the “Great Recession.” Historically, significant economic downturns are followed by a big bounce back. For the 10-years following the Great Recession, the economy has grown at right around 2% annualized. Not only is that not a big bounce, but it’s well below trend growth.
Remember, the chart of commodities tells us that we haven’t been in the longest expansion on record, but rather, we’ve been in a depression — the pain only buffered by trillions of dollars of central bank intervention. We should see a period of better than trend growth to put us back on the path of the long-term trend.
6) This aligns well with the 1994-1995 analog we’ve been discussing all year long, where the Fed is forced back into an easing stance, and triggers a late 90s type of boom and stocks and the economy. Following the Fed’s pivot in ’95, the economy went on to average 4.5% quarterly annualized growth through the end of the 90s. And stocks did this …
7) Aside from the very strong tailwinds of monetary and fiscal stimulus, plus structural reform, we have another (very big) “boom catalyst” coming down the pike. 2020 will be the year that 5G (high-speed, omnipresent wireless internet) goes mainstream. This will dwarf the lifestyle changes we’ve seen in the first two phases of the internet. This is a full-blown fourth industrial revolution. The CEO of Qualcomm has said this global infrastructure that will connect nearly 30 billion devices over the next three years will have a similar impact to the introduction of electricity.
All of this and the Fed is projecting just 2% growth next year. And Wall Street and the economist community tend to anchor their forecasts on the Fed. Once again, the bar has been set low. This sets the table for positive surprises next year.
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