Low rates, trade tensions, no recession: Why 2020 is shaping up to be a lot like 2019. Chidley,
Low interest rates, trade tensions and no recession
If you’re busy wrapping stuff ( good for you) or hitting the malls ( left it kind of late, didn’t you?), then don’t bother reading this. Seriously. You’ve got better things to do than suffer through another year-end outlook for investors. Come mid- December, you can’t swing a cat without hitting one of these things. Still, if you’ve stumbled into this outlook, and you are still reading, then thank you. And also sorry — because if you’re expecting prognostications of screaming buys or impending doom, or a revelation of the big trends that will change everything in 2020, then you will find herein only bitter disappointment. These predictions, in short, are very boring. Here they are anyway:
❚ Oil prices will go pretty much nowhere: Is there any good reason to think oil will break out of the sub- US$ 75 range it’s been stuck in since 2015? Non-OPEC+ members will continue to counterbalance any price support from OPEC+ production cuts. Plus, global demand growth is expected to slow.
❚ The impeachment of Donald Trump will be the non- story of 2020: From an investor’s perspective, it’s already the non- story of 2019, as markets have barrelled through the impeachment trial in the House of Representatives. Next year will give investors even less to get worked up about, as the Senate will pardon Trump as it has every other impeached president in U. S. history ( all two of them). The media narrative will turn to whether impeachment was good or bad for the Democrats or Republicans leading into the November election, and markets won’t care.
❚ The results of the U. S. election won’t impact markets much: Early on in the primary campaign, a Democratic victory next November became a kind of shorthand for doomsday among some U. S. market- watchers, especially on healthcare and insurance. That’s largely because of the strong initial showings by Medicare-for-allers Elizabeth Warren and Bernie Sanders. But as the primaries kick off in earnest in February, scares of a socialist regime in Washington will fade. (By Canadian standards, that would be the equivalent of an everyday Liberal regime in Ottawa anyway). Joe Biden, a moderate, is leading in primary polls now and will be the Dems’ candidate in the 2020 election. Call it a regression to the mean.
For the broader U. S. market, there could be some volatility as the presidential race heats up, but Biden is the zero- sum fear factor: he gets a plus for his opposition to Trump’s tariff war with China, a minus insofar as he represents higher taxes and more regulation. If I’m wrong and Warren is the candidate, healthcare and insurance companies might be hit hard in the run- up to election night, and harder if she wins. But she won’t. And even if I’m wrong about that, she has vowed not to introduce Medicare- for- All until her third year in office — which by the political calendar is roughly forever. Anything can happen in that time, or nothing can happen. My bet is on nothing.
❚ The trade war will not end in 2020: Or more specifically, the uncertainty the U. S. trade war with China has created will not end. That’s because Donald Trump will still be president at least until the end of 2020. The “Phase 1” deal announced last week ( but still not detailed) won’t be followed by “Phase 2”; if Trump wins in November, punitive tariffs on China, and retaliatory tariffs from China, will probably become the new normal — having less impact, but still grinding down global trade and inhibiting business investment. Maybe Trump will engineer an October Surprise and announce a new deal, but I can’t see Beijing agreeing, at least not without exacting a heavy and politically unsalable price from the U. S.
❚ The bull will keep running anyway: Just not as fast. Though there might be bumps along the way based on events next year, it’s hard to foresee much undermining a steady climb in equity valuations. I wouldn’t expect a repeat of this year’s blockbuster returns, however. The S& P 500, for instance, started 2019 in a profound funk after losing nearly 15 per cent between September and late December 2018; it’s gained more than 27 per cent so far this year. But that’s more likely coming off a down period than when valuations are already high, as they are now. ( The S&P 500 price-to-earnings ratio is near 24; a year ago, it was 21.) On the other hand, 2020 might be a year for a resurgence in emerging market equities. The MSCI EM index gained “only” 10 per cent this year; valuations are still relatively low.
❚ Interest rates will be low: No surprise, here. Monetar y policy- makers will not move very far from where they are now. Inflation expectations are grounded and low, and economic growth is steady and slow. Ultra- low rates will further inflate the global debt bubble, but I don’t see it bursting in 2020. In the meantime, low rates will support higher equity valuations.
❚ There will be no recession: Yes, global debt is ballooning, economic growth is slow, protectionism is on the rise and the business cycle must be getting long in the tooth. None of that will matter much in 2020, because monetary policy- makers will do whatever they can to extend the cycle, and the U. S. Federal Reserve, in particular, still has plenty of room to manoeuvre if it has to.
Granted, these are only predictions, and not very exciting ones at that. And I absolutely could be very wrong. The debt bubble could pop; a major military conflict could arise; the U. S.- China trade dispute could get worse. Any number of interesting and important things could happen to either upset the markets or provide a new boost. I just don’t think they will — in 2020, at least.