{"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