{"id":17768,"date":"2020-01-06T21:54:05","date_gmt":"2020-01-07T03:54:05","guid":{"rendered":"https:\/\/beckcapitalmgmt.com\/?p=17415"},"modified":"2023-09-25T13:10:21","modified_gmt":"2023-09-25T13:10:21","slug":"market-view-january-2020-headwinds-turning-into-tailwinds","status":"publish","type":"post","link":"https:\/\/www.beckcapitalmgmt.com\/blog\/market-view-january-2020-headwinds-turning-into-tailwinds\/","title":{"rendered":"Market View January 2020: Headwinds Turning Into Tailwinds"},"content":{"rendered":"
January 2020 Market View<\/strong><\/p>\n As we begin 2020, we would first like to review 2019 and then offer our thoughts for the coming year.<\/p>\n 2019 \u2013 Regaining Lost Ground and Then Some<\/strong><\/p>\n Few investors can forget the fourth quarter of 2018, a period in which the S&P 500 lost more than 20% from peak to trough.\u00a0 We have written in the past about the culprit for that market decline: Federal Reserve Chairman Jerome Powell and his injudicious comments in October 2018 about aggressively raising interest rates. \u00a0Powell\u2019s pulling back from the brink of interest rate Armageddon started the rally which lasted throughout 2019 and gained steam in the fourth quarter of last year.<\/p>\n In early 2019 we forecast a year-end S&P 500 print of 3,100.\u00a0 In fact, the Index did better than we had thought possible, closing at 3,230.78.\u00a0 While the Fed helped propel the stock market with lower interest rates, the market overcame several headwinds, the most significant of which was trade tension with China.\u00a0 Other headwinds were: 1) a slowdown in corporate capital spending, 2) a strong U.S. Dollar, 3) domestic political strife, and 4) mediocre economies in Japan & the European Union.\u00a0 It is notable that the market advance last year was almost entirely due to price\/earnings multiple expansion, as earnings growth for the S&P 500 was nearly flat in 2019.\u00a0 We note that several Wall Street strategists who forecasted flat earnings for 2019 in their year-end prognostications missed a wonderful recovery from the dismal fourth quarter of 2018 and a strong 2019.\u00a0 It just goes to show that markets can move on more than just earnings alone.\u00a0 The price\/valuation puzzle is complex and multi-dimensional.<\/p>\n 2020 \u2013 Headwinds Turning Into Tailwinds<\/strong><\/p>\n The headwinds that the stock market faced in 2019 are seemingly turning into tailwinds.\u00a0 On earnings, many Wall Street strategists see 5 – 7% growth this year after no growth last year.\u00a0 That range would be higher if not for the energy sector\u2019s weakness and Boeing\u2019s troubles with the 737 Max.<\/p>\n <\/a>Trade represents another negative turning into a positive.\u00a0 In mid-January, President Trump expects to sign the Phase I trade deal agreement with China.\u00a0 While the final details have yet to be released, especially the amount of Chinese purchases of U.S. agricultural goods, it appears the Administration has reached an agreement that Wall Street accepts.\u00a0 While we all understand the virtues of free trade, we never believed those who forecasted a weak domestic economy simply due to the imposition of tariffs on one country<\/em>: China.\u00a0 We believe those who did make such forecasts neglected to closely study the Smoot-Hawley Tariff Act of 1930 which was a main culprit of the Great Depression.\u00a0 Smoot-Hawley created tariffs on over 20,000 foreign goods (affecting nearly all U.S. trading partners) and was thus extraordinarily restrictive to domestic economic growth.\u00a0 While China is a significant trading partner of the United States, Canada and Mexico together represent a larger share of our imports.\u00a0 Further, in this global economy, many companies have the flexibility to move their supply chains to avoid tariffs.\u00a0 Many of those supply chains have indeed moved, probably permanently, to the chagrin of China.\u00a0 Thus far, the Administration\u2019s trade policy has worked to squeeze some concessions from China.\u00a0 We will get the details in about one week on Phase I, but difficult negotiations remain.\u00a0 The issues are complex and the relationship with China is intractable.<\/p>\n Another major trade initiative of the Administration, revamping the North American Free Trade Agreement (NAFTA) into one with more favorable terms to the United States, finally passed the House of Representatives on December 19.\u00a0 More votes are yet to come; the U.S. Senate will vote soon and Mexico & Canada will vote again in the near future.\u00a0 Some Wall Street strategists believe that a revamped NAFTA (now USMCA) could add between .2 – .3% to Gross Domestic Product growth of the United States.<\/p>\n While corporate management teams have been very conservative in their outlook as a whole, we believe movement on China trade, USMCA and perhaps BREXIT (the U.K.\u2019s withdrawal from the European Union) will cause them to become more positive.\u00a0 More positive outlooks from the C-Suites in the U.S. could translate into increased capital spending.\u00a0 We will be listening very carefully on our fourth quarter earnings conference calls for this improved outlook.\u00a0 In this era, technology companies are typically the largest beneficiaries from increased capital spending, as payback periods from computer software and hardware are much shorter than from bricks-and-mortar & capital equipment.<\/p>\n <\/a>With trade deals emerging, corporate management teams becoming more positive, interest rates forecasted to remain low for an extended period, and U.S. consumer spending remaining strong, we will be watching for a pick-up in economic growth in Europe and the Emerging Market countries.\u00a0 It seems that every January the same set of analysts forecast a pick-up in these areas and we\u2019ve been quite skeptical in the past.\u00a0 This year however, we are starting to see \u201cgreen shoots\u201d: the U.S. Dollar has recently weakened notably, several emerging market ETFs have perked up, and a few large European banks and industrials have also started to move.\u00a0 Could we be seeing the beginning of an uptick in global growth?\u00a0 Time will tell, and we will be watching extremely closely for new opportunities in overseas markets.<\/p>\n Near-term Risks<\/strong><\/p>\n What could upend the positive picture that now presents itself?\u00a0 There are several developments which we are monitoring that could negatively impact the outlook this year:<\/p>\n We would be na\u00efve to think that markets could completely withstand the economic uncertainty from a lengthy conflict in the Middle East.\u00a0 We invested through the first Gulf War in 1990, and the Iraq War from 2003 to 2011. Both were unique in their duration and effect, and any conflict with Iran would be different from the prior two Middle East wars.\u00a0 Our energy independence now versus then is one factor that would insulate the United States from a major economic shock, unlike before.\u00a0 The facts that Iran is economically crippled from U.S. sanctions, and the U.S. military is vastly more powerful than Iran\u2019s, also lead us to believe that any conflict would be short-lived.\u00a0 We put the odds of an outright lengthy conflict with Iran at less than 10%, but that could increase with unforeseen events.<\/p>\n While no signs are emerging of a meaningful pickup in price inflation, if inflation were to somehow emerge it would bring the Federal Reserve\u2019s current policy on interest rates into question.\u00a0 Today, artificial intelligence, robotics, communications, and software are exerting deflationary pressures.\u00a0 They, along with the decline in labor\u2019s bargaining power, increased speed of retail price adjustments, and the reduced inclination of companies to raise prices, contribute to inflation that remains below the Fed\u2019s target.\u00a0 We believe it would take quite an external shock to drive inflation meaningfully higher \u2013 therefore we put the odds of a meaningful pickup in inflation at less than 10%.<\/p>\n 2020 is a presidential election year.\u00a0 We note that Sen. Sanders had the largest fundraising haul among Democrats in the fourth quarter of 2019.\u00a0 Sen. Warren is also a worthy challenger for the Democratic Party\u2019s nomination.\u00a0 Both are proposing tax, regulatory and trade policies that are far to the left of existing policy.\u00a0 However, if either were elected, both the Senate and House would need to be controlled by their party to make major policy changes. \u00a0A full repeal of the 2017 tax reform act would require the approval of Congress.\u00a0 One could envision, however, the use of Executive Orders to accomplish changes in healthcare, energy, student debt and trade.\u00a0 We put the odds of a Progressive overhaul of the entire U.S. economy at less than 5%, but should either Sen. Sanders or Sen. Warren be elected, changes could be affected on the margin that could impact certain industries, such as those named above.<\/p>\n Since the 2016 election, some Members of Congress have had the big Silicon Valley tech companies in their sights.\u00a0 Convinced that these companies\u2019 influence has grown to such a degree that they disproportionately and negatively exert control over consumers and voters, some Members are searching for means to force Facebook to separate Instagram into a stand-alone entity.\u00a0 Other Congressional and regulatory initiatives are possible.\u00a0 Europe is considering establishing Digital Service Taxes on the advertising revenues of tech giants Google, Amazon and Facebook.\u00a0 We find it very difficult to put odds on this regulatory risk, as it is within the realm of several different countries and different legislative bodies.\u00a0 However, the topic has been widely discussed on Wall Street, therefore any legislative and regulatory action is unlikely to be a major surprise, if it happens.<\/p>\n Continuing Tailwinds<\/strong><\/p>\n The U.S. continues to be a place of technological innovation and leadership<\/u>.\u00a0 This technological leadership will translate into large investment opportunities in the future.\u00a0 In a prior letter we wrote about 5G \u2013 the next generation in wireless communications.\u00a0 This innovative connectivity will impact many sectors of our economy – from transportation, to healthcare, the environment, buildings & manufacturing.\u00a0 5G is destined to be huge, and impact nearly every human activity.\u00a0 Add 5G to artificial intelligence, robotics, breakthroughs in biotechnology to treat cancer & other diseases, and it is easy to see that the U.S. remains the leader in technology and innovation.<\/p>\n The U.S. consumer remains buoyant<\/u>.\u00a0 The U.S. unemployment rate is 3.5%.\u00a0 Consumer confidence and real consumer spending remains strong.\u00a0 U.S. consumer balance sheets are carrying the lowest debt service obligations in 40 years.\u00a0 Average FICO scores are near all-time highs.\u00a0 Unfilled job vacancies remain above 7 million – there just aren\u2019t enough qualified workers to fill the jobs.\u00a0 Wages are rising across all levels of income.<\/p>\n The U.S Federal Reserve remains on hold<\/u>.\u00a0 The Fed forecasts inflation below their target for the intermediate future, likely held down by small productivity gains and companies unwilling to raise prices.\u00a0 While the Federal budget deficit and national debt are longer-term concerns, at current interest rate levels the financing of the Federal debt has not been a problem.\u00a0 Longer term, we can see where large budget deficits and the national debt become issues \u2013 and we do not discount the chance for a period of high inflation in the distant future.\u00a0 If that comes to pass, we expect to be heavily exposed to real estate and other \u201chard\u201d assets.<\/p>\n The U.S. is increasingly seen as an attractive place to do business<\/u>.\u00a0 The Administration\u2019s commitment to lower regulations, in addition to tax decreases, has made the U.S. a more competitive and friendly place to do business.\u00a0 The American market is huge, immigrants want to move here, and opportunities are great.<\/p>\n Bonds \u2013 An Area We Are Avoiding<\/strong><\/p>\n With interest rates this low, we are surprised that bond funds and bond ETFs enjoyed large capital inflows during the fourth quarter of 2019.\u00a0 The after-tax yield on bonds now is miniscule, and while we do not expect any meaningful uptick in interest rates soon, should there be a surprising uptick in rates, recently purchased bonds could experience punishing losses.\u00a0 Bond funds and bond ETFs also carry their own unique risks, chief among them: illiquidity \/ lack of bids in a fast market.\u00a0 This risk is amplified the farther down on the investment-rating scale one goes, with high-yield (junk) bonds subject to the worst losses with an uptick in rates.\u00a0 We are simply not willing to assume these risks for our clients now \u2013 the rate of return on bonds, after-tax & net of fees, is simply not worth the risk.\u00a0 If anyone tries to sell you on investing in bond funds or bond ETFs in this environment \u2013 run!\u00a0<\/strong><\/p>\n Our Investment Process<\/strong><\/p>\n Each day we spend the bulk of our time researching new investment ideas, monitoring current positions and ensuring our client portfolios closely fit their assigned models.\u00a0 Our research process is data-driven and repeatable.\u00a0 We use several institutional-quality databases, news services and research sources to assist us in our decision-making.\u00a0 While investing is both art and science, we lean heavily on data as we manage investments.\u00a0 Our personal \u201cfeelings\u201d have no role in our investment decisions; we want hard facts.<\/p>\n Finally<\/strong><\/p>\n As you can imagine, we hear many different perspectives from our clients.\u00a0 Part of our role as investment advisors and managers is to help our clients focus on salient facts and eliminate the constant \u201cinfield chatter\u201d that goes on during the investment game.\u00a0 That chatter often comes through the broadcast financial media.<\/p>\n If you have visited our offices, you have undoubtedly noted the many flat screens we have running during the day tuned into CNBC or Fox Business News.\u00a0 Please do not let that throw you off – we do not watch them much, and neither should you.\u00a0 Rarely does one hear good investment ideas on TV.\u00a0 In fact, they are often a source of bad information, in our opinion.\u00a0 They are in the business of capturing your attention and will say almost anything to get it.\u00a0 You might ask, \u201cWell, why do you have them on, if you feel like that?\u201d\u00a0 Answer: about three times per week there is a guest worth listening to.\u00a0 We know who they are, simply because we\u2019ve been around this business for so long.\u00a0 So, we encourage you: turn off the financial news and go enjoy your life.\u00a0 Don\u2019t let them upset you.\u00a0 Let us worry about your investments.\u00a0 After all, that is what you are paying us to do.<\/p>\n Best wishes for a happy and prosperous 2020,<\/p>\n www.beckcapitalmanagement.com<\/strong><\/a> https:\/\/www.facebook.com\/BeckCapitalManagement.com<\/strong><\/a><\/p>\n Investment advisory services offered through Beck Capital Management LLC, a registered investment adviser. This material represents an assessment of the market and economic environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. Forward-looking statements are subject to certain risks and uncertainties. Actual results, performance, or achievements may differ materially from those expressed or implied. Information is based on data gathered from what we believe are reliable sources. It is not guaranteed as to accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions. It should also not be construed as advice meeting the particular investment needs of any investor. Past performance does not guarantee future results. Nothing contained herein is to be considered a solicitation, research material, an investment recommendation or advice of any kind. The information contained herein may contain information that is subject to change without notice. Any investments or strategies referenced herein do not take into account the investment objectives, financial situation or particular needs of any specific person. Product suitability must be independently determined for each individual investor. Beck Capital Management explicitly disclaims any fiduciary responsibility or any responsibility for product suitability or suitability determinations related to individual investors, as may relate to the information contained herein. The Standard & Poor\u2019s 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general. It is a market value weighted index with each stock\u2019s weight in the index proportionate to its market value. There is no guarantee that companies that can issue dividends will declare, continue to pay, or increase dividends.<\/p>\n","protected":false},"excerpt":{"rendered":" As we begin 2020, we would first like to review 2019 and then offer our thoughts for the coming year.<\/p>\n","protected":false},"author":3,"featured_media":17416,"comment_status":"open","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"content-type":"","footnotes":""},"categories":[23],"tags":[19,20,21,22,24,25],"coauthors":[114],"acf":[],"yoast_head":"\n\n
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