2019 is closing with astounding speed.
As we move into the final weeks of this year, many are turning towards spending time appreciating what 2019 has given to us. We also look forward to the New Year, expectations for the market, and what potential outcomes we could discover in 2020.
Certainly the Presidential election is going to be a dominating topic, and one that markets will be paying close attention to. Economics and the Fed are a close second to what will be in focus for 2020. Lastly, corporate earnings will also play a key role in what may happen in capital markets.
Presidential elections have historically been interesting years for investors. Typically, capital markets are most sensitive to corrections early in the year when high uncertainty is apparent with regards to whom may be elected and during the primary portion of the election cycle. As we get into the middle of the year, typically more clarity on candidates and probability of who may be elected, and each potential outcome becomes a hot topic for discussion and debate. In election years where there is an incumbent President seeking re-election, the risks of more extreme market movements increase.
Despite the election cycle dominating many headlines, we must also consider economic levels, and perhaps even consider who the candidates end up being. We are now in an unprecedented territory in terms of the length of this expansion cycle. We are entering the 11th year for US expansion and that caries some risk that economic downturns could develop. There will likely be many predictions about “if _______ wins…” which gives talk-show hosts endless fodder to discuss and pontificate over. Some might spook or excite investors. Any headline risk will be a theme that can increase volatility in 2020.
Despite the inherent risks of election cycles and an aging economic expansion, current economics supports continued growth. Ned Davis Research has published their estimates for S&P 500 growth in 2020 and they base it on several factors and average those independent factors to arrive at their estimate of S&P 500 growing to 3325. Below is a table outlining the metrics they considered in building this estimate. This represents roughly 5% growth from the levels the S&P 500 is currently trading at the time of this commentary.
As with all estimates and predictions, it is best to interpret this considering potential growth versus historical averages. Historically, the S&P 500 stock index has averaged growth of roughly 7% per year in growth. I would argue that this is in line with average expansion given the range of possibilities we are facing. This is especially true in light of 2020 being a major election year and one that likely will be filled with some degree of drama.
As we head into 2020, it is good to consider two likely scenarios. First, that election years are often subject to more than one moment of uncertainty, which can lead to corrections. Secondly, that economics are currently not flashing any huge warning outside of the sheer length of this expansion cycle. We have had a Fed that is supporting the economy, it appears there has been major headway on trade negotiations and even though we saw an inverted yield curve in 2019, up to 36 months have historically been observed between first inversion and recession.
Regardless of what lays ahead, we will go through this together and rely on facts to determine our actions. We are thankful for all of you this holiday season and wish you and your families the warmest and most wonderful Christmas and New Year!
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