Like Diogenes with his lantern, I am, again in 2020, a cynic looking for truth (and an honest investor) as I engage in my annual assault on the consensus and "Group Stink."
More than any year in the last decade, the contour of the U.S. stock market will likely be importantly influenced and shaped by politics and profits in 2020. Surprises in the political arena and in corporate profitability are my most important deviations from the consensus.
2020 could be the year of mean reversion -- a year of the vanishing Fed (and global central banker) put and a surprising turn in central bank policy (by the ECB), weakening global economic growth and less-than-expected corporate profits (again), political upsets (again), rising geopolitical risks (and global conflicts), a general recognition of the risks associated with untamed deficits and large debt loads and general market instability.
Remember, my Surprise List is not a set of forecasts. Rather, the List represents events that the consensus views as having a low probability of happening (20% or less) but, in my judgment, have a better than 50% chance of occurrence. In betting parlance this is called an "overlay."
The complete list and discussion of my 15 Surprises for 2020, is available on Real Money Pro:
Click here for Surprises 15-11
Click here for Surprises 10-6
Click here for Surprises 5-1!
Surprise: Disappointing Global Growth, Weakening Corporate Profits, a Fed Pivot and Political and Geopolitical Instability Produce a 'Garden Variety' Bear Market in 2020As we entered 2020 the almost universal view is that liquidity and the central banks' put, at the very least, provides a market floor and at the best, will contribute to the next speculative leg of the decade old Bull Market as the market train is supported by the Fed trestle.
As I finished My 15 Surprises for 2020 and reviewed the extraordinary nature of the 2019 market -- I marvel at the Bull Market in Complacency that seems almost at the polar opposite of the doom and gloom that existed on Dec. 26, 2018, a bit more than 12 months ago. As an example, the CNN Fear & Greed Index was around 2 (!) a year ago compared to 91 (!) recently. The same applies to the flip flop in AAII sentiment (from very bearish to very bullish -- and with the gap between the two moving to over 40).
I would be less concerned with the outlook if the market's 2019 advance was earnings derived. It was not -- like in 2013 it was entirely based on a reset of higher valuations (from a P/E of 14.5x at year-end 2018 to approximately 19.0x at year-end 2019). Indeed, consensus 2019 S&P EPS forecasts stood at about $178/share 12 months ago -- they are likely to fall in the $163-$164/share level range. As to the 2020 S&P EPS consensus estimates, they, not surprisingly, stand at the same $178/share recently! They will likely miss (by an unusually) wide mark, again.
And I would be far less concerned if a changing market structure (the proliferation and popularity of ETFs and the dominance of risk parity and quant products and strategies) coupled with the death of active investing had not served to exaggerate upside price momentum -- foiling the natural price discovery many of us "old timers" yearn for.
Meanwhile, precious metals have made a very "quiet" stealth rally -- just look at (GLD) 's chart over the last seven weeks. (What are the gold traders seeing that we are not?)
The majority of "talking heads" who hated stocks a year ago are uber bullish on equities this year. (Didn't we learn from the wrong-footed consensus interest rate forecasts of last December, that self confidently called for a 3.5%+ 10-year U.S. note yield at 2019 year-end?)
Am I concerned? Should investors be concerned? You are damn right.
The competition from other streaming services causes Netflix to lose millions of domestic subscribers. The whole pricing power story unravels and market loses faith in the cash burning narrative. Netflix's shares trade down to $200/share.
Surprise: The China Trade Deal Falls Apart, China's Patience With Hong Kong Runs Out and There Is a Global Shortage of ProteinChina doesn't comply with "Phase One" of the trade deal which offers little more than purchasing needed agriculture products and fails to protect U.S. intellectual property.
China's patience in Hong Kong runs out and it takes action that sets off both a geopolitical and stock market crisis. China's aggression ends any chance for a "Phase Two" trade deal.
The trade war is reignited and tariffs are reimposed on China.
Capital spending, consumer and business confidence falters.
Speaking of China, the effects of African Swine Fever Virus cause a global shortage of protein. The immediate impact a year ago was wholesale slaughtering, which created a short-term surplus. But now there aren't enough pigs. Pork prices soar with beef, chicken and fish prices rising in sympathy.
Surprise: Despite Weakening Economic and Profit Growth the Federal Reserve Does Not Lower Interest Rates This YearInstead of waiting until the end of the second quarter as they currently have planned, the Fed ends the expansion in their balance sheet by February or March. The liquidity spark helping stocks thus ends early.
Foreigners lose their appetite for U.S. corporate debt and government securities and, despite disappointing U.S. economic growth, the 10-year U.S. note yield climbs to over 2.50%.
Surprise: Trump's Popularity Falters Badly, the Progressive Wing of the Democratic Party Fails to Catalyze Voters, Biden Easily Wins the Presidency and Democrats Have a Clean Election Sweep (As Women and Millennials Show Up in Droves)According to PredictIt and most of the other polls, the general expectation is that President Trump will narrowly win the November election, the Republicans will retain control of the Senate and the Democrats will keep control of the House.
As in 2016, the (political) consensus proves to be mistaken in 2020.
To summarize, several trends become apparent early in the year, leading to Senator Biden eventually being named the Democratic party's Presidential nominee. Biden's lead in the polls climbs and Trump trails by a surprisingly large percentage by early summer. In another surprising election result (much like four years ago) -- it's a clean sweep for the Democrats -- Biden easily wins the November election, Democrats narrowly regain control of the Senate and the Democrats maintain control of the House.
Here is how this and the other surprising political events leading up and into the November election could go down:
-- Democratic Progressive presidential hopefuls fail and fall early - Biden is the Nominee.
-- Trump's popularity slumps under the weight of impeachment and revelations.
-- Voter turnout rises dramatically and Biden easily wins the presidential election and the Democratic Party sweeps the congressional elections.
(This commentary is excerpted from and originally appeared on Real Money Pro on Jan. 13. Click here to learn about this dynamic market information service for active traders and to receive Doug Kass' Daily Diary plus columns from Paul Price, Bret Jensen and others.)