Outlook 2020

Outlook 2020

Mark Lazar’s 2020 Full year Outlook Newsletter

The best thing about the future is that it comes only one day at a time. Abraham Lincoln

Economic outlook

The US economy is on solid footing and is now in the 127th month of consecutive expansion; the longest in history. Unemployment is currently 3.5%, and the U6 dropped to 6.5% in November, the lowest on record. 2020 US GDP is forecast at 2.1%, slightly lower than 2019. Trade anxiety has largely been allayed with a Phase 1 China deal in hand in addition to a recently inked USMC agreement. The Administration is now seeking improved trade agreements with Europe, post-Brexit Britain, and India in 2020. The market also has greater clarity in regard to the UK’s pending divorce from the EU, which has bolstered the pound by nearly 8% from its August lows.

Inflation is forecast at 1.9%, down from 2019. Monetary policy appears to be on a Goldilocks glidepath; maintaining economic momentum, full (if not overly so) employment, and inflation at or below the Fed’s target rate of 2%. Chair Powell and Co are deserving of a standing ovation.

Consumer confidence is approaching an eighteen year high. Buoyed by low interest rates and low inventories, the housing market should continue to climb, both in terms of building and prices, albeit at slower pace. Business investment (CAPEX) was below trend in 2019 but look for it to accelerate in 2020.

Domestic stocks

S&P 500 earnings are forecast at $178/share, which presently puts stocks at 18.7 x forward earnings. If correct, stocks are trading at a slight premium to the long-term average. However, equities appear fairly valued in light of above-trend earnings growth (9%+ YOY) and below average interest rates, both of which serve to make future earnings more valuable and, thus, higher support P/E multiples.

Foreign stocks

Europe’s economy is forecast to grow at 1.4% this year, a slight increase to the 1.2% pace for the prior year. At 22.66%, the EAFE index delivered strong performance in 2019. The forward multiple is 14.9, or about 20% cheaper than US equities, and earnings are expected to grow by 8.5%, just below the S&P 500. Exchange rates should provide foreign stocks with a slight tail wind, as the euro is expected to strengthen slightly against the dollar this year.

Emerging market stocks

Emerging markets enjoyed their second best year since 2010, returning 18.42% in 2019. However, the 10-year average return for EM was a dismal 3.68%. EM still isn’t cheap, as the forward multiple, 13, is still slightly above long-term average. Emerging market stocks tend to run in something close to a 10-year cycle, and EM may very well outperform both domestic and developed foreign equities over the next decade.

Fixed income

The 10-year Treasury yield started the year at a lackluster 1.88%, then promptly dropped twenty basis points in the first three weeks. Of course, 1.68% seems attractive compared to the negative yields offered in countries like Germany, France, Netherlands, Switzerland, Japan, Denmark, Austria, Finland, Ireland, and even Slovakia!

The Fed Funds rate (range, actually) is currently 1.50–1.75%. Furthermore the Fed’s dot plot conveys no expected change in interest rates for the year. With inflation at or slightly below the target rate, full employment, and the economy growing at a healthy clip, there’s little reason for the Fed to do anything other than sit quietly in the corner and remain watchful.

Interestingly, spreads have compressed from nearly 2 ½% in June 2019 to 1.98%. The credit markets are remarkably sanguine, pricing in virtually no credit risk to US corporate credit. Conversely, Moody’s recently assigned a “negative” outlook to the Eurozone, meaning euro debt definitely has more hair than US debt.


There aren’t any apparent bubbles in either security prices or real estate. Fundamentals are healthy, and price levels and value appear to be closely aligned. Barring a black swan event, markets are poised to deliver positive, but below-average returns. If S&P 500 earnings align with expectations, stocks could yield mid-single digit returns in 2020.

Absent monetary easing or a credit event, bondholders will likely “clip coupons,” more or less receiving the current yield, meaning expect bond returns to be below-trend as well.

Foreign markets are always more difficult to forecast due to the absence of a unified fiscal policy, not to mention the ECB’s “creative” monetary schemes, however, both developed international and emerging market equities appear to have a higher probability of matching or exceeding domestic equities in 2020.

Investors looking for a repeat of 2019 will be sorely disappointed with 2020. Markets are forward-looking, and priced 2020 expectations into last year’s security prices. However, the market and the economy, while closely related, do not move in perfect unison, and soft returns in the market don’t necessarily signal the end of the economic expansion. Bull markets don’t die of old age. Rather, they die of policy failure; monetary, fiscal, or both. Taxes are low, inflation is tame, the Fed is accommodative, and corporate America is enjoying a business-friendly regulatory environment. Nothing lasts forever, and while the current economic expansion is a geriatric as far as business cycles go, it’s not showing signs of ending anytime soon.

Mark Lazar, MBA
Certified Financial Planner®