Coming off the 31 percent gain in the Standard & Poor’s 500 index for 2019, with more record highs since then, it’s easy to feel good about the equity markets for 2020, despite some headwinds.
Brexit? That was so 2016. Middle East turmoil? Same as it ever was. Trade wars? Don’t worry, it’s an election year. Slowing U.S. growth? You’re joking, right? Did you see Friday’s report of 225,000 new jobs in January?
The United States borrowing $1 trillion to pay for a tax cut that doesn’t lead to higher revenues? Hey, the economy is growing.
How about the coronavirus that’s leading to a partial quarantine of the world’s second largest economy? We saw the Dow Jones Industrial Average skid by 603 points a week ago Friday on fears of a pandemic. Then in the first three days of this past week, the bellwether index soared back and more, with a 1,035-point climb.
That’s the swagger of a market that keeps going despute talk of a bubble bursting. And that’s the picture that Liz Young, a top market strategist at BNY Mellon, brought to a ballroom full of 400 financial analysts Thursday night in Hartford.
“We thought, that’s it, this virus is going to wipe it out and send the world into a recession,” Young told the Chartered Financial Analysts Society Hartford chapter — which includes many from the Connecticut shoreline and Gold Coast.
“So what happened this week? It’s like we’ve forgotten that it happened.”
Likewise, for 2020, Young sees more resilience, with the market returning to fundamentals — a stronger link between corporate profits and stock performance.
The good news there: BNY Mellon, with $1.9 trillion under management at all of its affiliates, forecasts 9.5 percent gains in earnings per-share at the S&P 500. That’s down from 11.2 percent in 2019 but well ahead of the 6 percent average of the last 60 years.
Young’s takeaway from the coronavirus volatility: No one should make light of the crisis. But global markets can handle it easily especially since it appears the effects on overall economic activity will be temporary.
“The selloff on Friday was overdone, but likewise I think the rebound on Monday and Tuesday was a bit overdone,” said Young, director of market strategy for BNY Mellon Investment Management, a frequent guest and guest-host on CNBC and other financial media.
And the lesson in the big picture reflects the state of the markets heading into President Donald Trump’s fourth year.
“We pay so much attention to headlines, and we have this illusion that we’re supposed to do something about it. And most of the time we’re not,” Young said.
That means events that move markets shouldn’t move investors to change their allocation strategies, such as from U.S. stocks to treasury bonds.
It’s soothing talk for the crowd at the annual forecast dinner of the CFA Society, which comprises fund managers, analysts and wealth advisers with the highest level of certification.
Timothy Cashman, investment strategist with Wells Fargo Private Bank, in Greenwich and Hartford, recalls how the terrorist bombing in a Madrid train station in 2004, killing 191 people, not only rocked global markets but led to the first level of a market halt.
Would that happen today? Maybe not, he mused.
“The market’s ability to absorb these world events has really increased in the last 15 years,” Cashman said Friday, reflecting on Young’s talk the night before. “Part of it is due to globalization, speed of the internet. ... There’s more events happening, which is unfortunate.”
The globalization issue cuts both ways, as we see in the trade wars — which could slow global trade and hurt economies, but which also reflect nations more insulated from shocks.
For example, Cashman said, the United States now produces more oil and gas than Saudi Arabia, the dominant OPEC nation.
And to the extent that Trump’s escalating tariffs hurt markets, Cashman said, “He doesn’t want a full-blown trade war with China in an election year.”
So, what’s the forecast for 2020 on 10-year treasuries and U.S. large-cap stocks?
Young didn’t give specific figures, but BNY Mellon’s clear direction is stable for long-term interest rates and up for stocks, in an environment that eats bad-news headlines for breakfast.
The heavy reliance on fundamentals makes for simple, folksy wisdom in some ways of looking at it, but it’s backed by BNY Mellon’s four-scenario analysis.
In the first scenario, which BNY Mellon pegs at a 40 percent likelihood of happening, “progress on trade talks helps stabilize manufacturing. The sharp fall in bond yields during 2019 helps ... boost demand in major economies,” the company’s report says.
And the Federal Reserve holds off on any moves. Stable growth, in other words.
In the second scenario, just 10 percent likely, the economy overheats and the Fed has to pull back with rate hikes, leading to a possible 2021 recession.
As an aside, before we get to the last two scenarios, any of you Democrats secretly or not-so-secretly hoping for a recession in 2020 in order to oust Trump, fuhgettaboutit. We’d have seen more slowing by now if that were happening.
The third scenario, called “Tail Wags Dog,” has a 25 percent likelihood. In it, market psychology overreacts to events, causing a downturn, especially in dot-com growth stocks. “The fear of a recession puts us into a recession,” Young said, in that scenario. “This could be triggered by a catalyst that we don’t see coming. ... As you know, our central bank doesn’t have as many tools in the toolbox anymore.”
And the last scenario, also with a 25 percent likelihood: “Globalization is dead!” That means fears of a massive de-globalization, with nationalist walls rising up, sends large economies downward.
Always, in market analysis and forecasts, there’s talk of history, what happened in the last downturns and and why. Young pointed to a analysis that shows the three Fed rate cuts of late 2019 leading to a likely stabilization, rather than it being too late to stave off a downturn.
As for the famous inverted yield curve in which short-term bonds are trading at higher rates than long bonds, it doesn’t always lead to a recession.
“There’s a lot of chatter about, we’re in the longest bull market of all time,” she said. “So that means it’s time for it to reverse. Why? Because the calendar says so? Because values say so?”
Nonsense, Young said, reflecting Wall Street’s confidence these days. It’s in some ways a conservative, middle path — steady growth — and in another way of thinking, a plunge into new territory, a bull market with no apparent end, in which the 2018 blip was just that, a minor correction.
“At some point we will have another recession. Shortly thereafter, we will have a recovery. There is no sense in trying to time that. There is no point in trying to recession-proof your portfolio.”