Dec 12, 2019

Axios Markets

By Dion Rabouin
Dion Rabouin

Hasta 2020, amigos! This will be my last newsletter of the year. I'm taking an extra-long weekend in Puerto Rico and then headed to the great state of Colorado for the holidays. Courtenay Brown and Jennifer Kingson will hold down Axios Markets until I'm back.

  • In the meantime, follow me on Twitter to keep in touch - @DionRabouin

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“You only go around once. But if you play your cards right, once is enough.” - See who said it and why it matters at the bottom.

1 big thing: Asset managers urge caution in 2020

Illustration: Eniola Odetunde/Axios

Investors can expect higher stock prices but also a lot of potential potholes in 2020, according to the investment forecasts of major asset managers.

What they're saying:

  • "[I]n 2020 the margin for error — and opportunity — will likely be as small as it’s been in a very long time," top strategists at State Street Global Advisors wrote in their 2020 outlook.
  • "We foresee ... a stock market that grinds higher, but downside risks are building," JPMorgan Asset Management's outlook said.
  • "We remain concerned about the risk/reward of the S&P 500 near term," noted UBS in its outlook.
  • "We expect a positive return for 2020, but muted," BlackRock's CIO of fundamental U.S. equities Tony DeSpirito said during a recent media briefing.

Threat level: Managers are predicting the U.S. will avoid a recession. But most say the biggest risk to that is the U.S.-China trade war, which could be ratcheted up at any second by a tweet from President Trump.

  • Outlooks also noted the risks of a recession in Europe, steadily declining U.S. profit margins, weakening global aggregate demand, a labor market slowdown, the 2020 U.S. presidential election, and the positive effects of the 2018 U.S. tax cuts fading.

The U.S. consumer was responsible for the lion's share of growth this year, as CEOs have lost confidence and corporations have pulled back and will need some help in 2020.

  • "Falling corporate profits, additional tariffs scheduled for mid-December and Fed rate cuts likely on hold for a little while may make it tough for the consumer to continue to shoulder this larger burden," State Street said in its outlook.

The big picture: None of these major asset managers predict a resolution to the trade war next year, but they almost uniformly expect a de-escalation. That will allow the U.S. economy to grow somewhere between 1.5% and 2% next year and continue to add jobs.

  • Such an environment is expected to support far-improved earnings growth near 10%.
  • It will have to, said Charles Schwab chief investment strategist Liz Ann Sonders. "The wide gap between stock market performance and corporate after-tax profits suggests the latter needs to accelerate."

Be smart: Few money managers gave an explicit S&P 500 target, but top strategists at John Hancock, Jeffries, Bank of America Securities and others predict the stock market rises only about 5% from its current level.

  • Goldman Sachs analysts were the bullish outliers, predicting the S&P rising to 3,400 by year-end and U.S. growth between 2.25% and 2.5%.
  • Even Macquarie, which projects U.S. stocks doubling in value by 2030, said they see the S&P only at 3,300 by year-end.
Bonus: Don't call it a comeback

Expand chart

Data: Investing.com; Chart: Axios Visuals

After years of U.S. outperformance, fund managers say they expect American assets to deliver gains in line with international markets in 2020.

  • Firms including BlackRock, BofA and JPMorgan say they are particularly bullish on emerging market equities, which have been unloved in 2019.

What to watch: They predict strong growth next year for EM countries, even as China's growth is widely expected to slow below 6%.

  • Big EM economies like Brazil, Russia, Mexico and South Africa are poised to see rebounds in growth after struggling in 2019.

Threat level: While his base case is that the growth decline has bottomed, a major risk to EM and global economic strength is India, BofA's senior global economist Aditya Bhave tells Axios. The country has seen its GDP fall from 7% in the second quarter of 2018 to 4.5% in Q2 this year.

  • "It's really concerning and risk is to the downside," Bhave says. "The slowdown is idiosyncratic and it's quite severe."
2. Catch up quick

Christine Lagarde will host her first press conference as ECB president this morning at 8:30 Eastern. (Bloomberg)

A total of 650 MPs will be chosen as Britain has its third election in less than five years today. (BBC)

CEO optimism fell for the seventh straight quarter, according to a survey from the Business Roundtable. (Axios)

Human and animal blood exports for medical purposes made up 2.3% of total U.S. export value in 2017, the most recent year for which data is available, according to a project of the United Nations Statistics Division. (Newsweek)

3. The everything rally could still happen
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Data: The Wall Street Journal, FactSet; Chart: Axios Visuals

After seeing losses in just about every major asset category in 2018, 2019 delivered strong returns for most assets.

  • Risky assets, in particular, paid off for investors as U.S. stocks and crude oil posted major gains.
4. A possible explanation for 2019's equity outflows
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Data: Investment Company Institute; Note: Nov. 2019 and Dec. 2019 data are estimates; Chart: Axios Visuals

The historic outflow from equity funds this year likely has a lot to do with the aging demographics of the U.S., analysts at the Investment Company Institute say.

What it means: Shelly Antoniewicz, ICI's senior director of industry and financial analysis, says that the record flows out of U.S. and global equity funds and into bond and money market funds largely reflect older Americans' desire for safety.

  • That desire is partially motivated by "uncertainty with trade and tariffs," but it's also about many baby boomers nearing retirement and shifting from stocks to bonds.
  • "When I map out the percentage of the population 65 and over with bond fund flows ... they’re rising in tandem," she tells Axios.

Details: As of the week ending Dec. 4, a record $186.5 billion has been pulled out of equity ETFs and mutual funds.

  • Equity ETFs have seen net inflows, while mutual funds have posted enormous outflows.
5. Growing dissatisfaction with USMCA compromise

Fed chair Jerome Powell said Wednesday that the new U.S. trade deal with Mexico and Canada should remove some trade policy uncertainty, and that it's a positive factor for the economy.

  • However, the U.S. Chamber of Commerce and other groups have been registering their unhappiness with the trade deal in recent days.

Why it matters: For most of the year, groups have been universally calling on Congress to pass the agreement. Now that the deal is near the finish line, it's facing mounting opposition.

What they're saying: "We are seriously disappointed by the removal of certain intellectual property provisions," Thomas J. Donohue, the Chamber's CEO, said in a statement. He specifically pointed to reduced protections for prescription drugs.

  • "USMCA is a step back from NAFTA and will yield limited economic gains," said Daniel Griswold, a senior research fellow with the Mercatus Center at George Mason University. The agreement will raise "prices for US families in the market for a new car or light truck, while reducing sales and exports of the domestic US auto industry."
  • The left-leaning think tank EPI said the revised deal "constitutes Band-Aids on a fundamentally flawed agreement and process."
6. The Fed's statement is a bit of a head-scratcher

Screenshot of the Fed's dot plot

Wednesday's FOMC meeting was largely a non-event, with the Fed holding U.S. interest rates steady as expected by nearly 100% of the market.

Between the lines: However, the Fed's statement and predictions for future policy left many confused.

  • Powell suggested a high barrier for rate increases in 2020, and a willingness to cut, but the Fed's dot plot shows a higher likelihood of rate hikes than rate cuts next year.

Of note: Powell also expressed the central bank's willingness to expand its Treasury purchase program to include longer-dated bonds if the repo market sees more stress, but held off on announcing a standing facility or guaranteeing any further initiatives to pump more liquidity into the market.

Dion Rabouin

The legendary Francis Albert Sinatra was born on Dec. 12, 1915. They say he did it his way and sold more than 150 million albums worldwide.