Every year has its own special weirdness. 2019 was no exception. The trade war with China saw virtually no progress, unless you want to count the Phase 1 deal (whatever that means) that is apparently agreed upon but not yet official.
We had an earnings recession, as companies were unable to grow their bottom lines. GDP growth remained in that maddening 2% range. Commodity prices were weak, as global growth fell to ~2.5%.
Clearly, the trade war has been the single biggest factor weighing on growth. China's economy has been slowing dramatically for a few years. And that lack of demand is significant for the entire world.
Debt levels are also an issue. U.S. corporations have been heavy borrowers. And governments around the world are piling it on.
U.S. deficit spending rose around 25% this year...
And the S&P 500 rallied some 25%, too. Coincidence? You tell me...
We can mostly thank the Fed and the EU central bank for turning the money spigots back on. But underlying the Fed's actions, the U.S. jobs market continued to provide, U.S. consumer spending stayed strong, and the housing market started showing real signs of life.
On the global front, Germany's economy is looking like it's ready for some real growth. And I think investors are anticipating some stimulus moves from China once the Phase 1 deal is complete. We've seen this pattern with China over the years: It tightens the screws on its economy to keep it from overheating, and then it returns to stimulus to boost growth.
It's tempting to say that a rebound in global growth is wholly dependent on resolving the trade war with China. But really, U.S. companies are pretty much done reworking their supply chains to avoid tariffs.
Crazy as it may sound, stocks have been pricing in a return to growth in 2020. Here's how I see it all playing out...
1. The S&P 500 high is 3,550. The companies of the S&P 500 should earn around $180 a share in 2020. That's a nice bump from the ~$163 per share for 2019. If we apply a P/E of 20 for 2020 earnings, we get... 3,600. I'm coming in just a little under that because estimates are always a little high.
2. Tech stocks lead again. Strangely enough, energy companies are expected to post the biggest year-over-year earnings growth in 2020. Crazy, right? In fact, I do think that's crazy. A 5G iPhone comes out in 2020, and 5G is what's going to drive the best earnings growth. However, I am less bullish on the big tech companies, like Amazon and Google. Smaller companies with 5G exposure will be the place to be. (Here's one of my favorites.)
3. Oil doesn't break $75. A return to global growth is bullish for oil demand. Still, there are strong trends working against it, namely electric vehicles (EV) and increased fuel efficiency for internal combustion engines. As I said earlier, I think China adds incentives for EV sales in 2020. Even a partial offset to increased gasoline use will keep pricing in check. Plus, oil markets remain oversupplied. OPEC can say it's capped production, but the minute oil breaks above $65, the cheating begins. Then there's heavily indebted U.S. tight oil companies. They gotta pump to pay the bills. Oil has been so out of favor, it might seem like a good contrarian play. I still think the fundamentals are working against it.
A couple more points here: 2020 will be the year that the EV transition starts to hurt auto companies. Electric engines/batteries have much longer lives than internal combustion engines. Plus, I expect people to start waiting for better EV battery storage. Push out a portion of your new car sales, and the GMs of the world could be hurting. Finally, better EV sales in China will reignite lithium stocks.
4. Gold to retest $1,250. Sorry, I just don't see it for gold. The Fed is not likely to cut rates, so expect U.S. dollar strength to weigh on gold prices.
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5. Streaming Wars. This one is gonna be fun to watch. Now that Disney+ is crushing subscriber growth numbers, Netflix could have a bad year. Its content costs will be a problem as growth stagnates. Look for the success of Disney+ to give Disney the incentive to really push the ESPN streaming service. Ultimately, I think Disney sells ESPN, because it is the perfect platform for live sports gambling, but gambling doesn't fit Disney's MO. Plus, it could use the cash. Look for a big jump in subscribers and a sale. Disney (one of my faves) will rally on an ESPN sale. In fact, I think 2020 is the year that DIS becomes a "must-have" stock, if it's not already.
6. 5G Wars. So many wars. We've got trade wars, streaming wars, and I think a 5G war is brewing between the U.S. and China. Both countries are already restricting tech sales to each other. This is really significant. Many U.S. tech firms (Qualcomm, Texas Instruments, etc.) get half their revenue from China. And due to Qualcomm's patents, it will have a chip in every 5G device out there. Wildly bullish. BUT what happens if China ignores trade rules and refuses to use Qualcomm/American chips? This is the dirty secret of the U.S./China trade war: neither side trusts the other. I don't think the U.S. and China formally break on tech in 2020, but the ground gets laid for it.
7. Medicare for all/health care stocks/end of Obamacare. It's no secret that the GOP wants to kill Obamacare and make that a campaign issue. Medicare for all is a big Dem issue. Neither is good for HMO stocks. Kill the Obamacare mandate, and many people will just stop paying for insurance. Get Medicare for all, and a good portion of people stop paying for insurance. Health insurance companies are parasites — billions in profits for pushing papers around. That's crap and a change is clearly needed. Maybe we get something from that Buffett/JP Morgan/Amazon collaboration in 2020?
8. Legal cannabis? Corporations are ready to put cannabis products on the market. Are the politicians ready to abide? I don't think either party is gonna want to muddy the water with the cannabis issue in an election year. So I think the chances of cannabis getting the nod in 2020 are slim. Sorry, I know we've all been waiting a long time for these stocks to come around. 2021 looks like the year...
There you have it. Please notice I did not put that the Baltimore Ravens win the Super Bowl. That's a slam-dunk that I'm just gonna pass on.
Have a great holiday, and I'll talk to you in the New Year!
Until next time,
A 21-year veteran of the newsletter business, Briton Ryle is the editor of The Wealth Advisory income stock newsletter, with a focus on top-quality dividend growth stocks and REITs. Briton also manages the Real Income Trader advisory service, where his readers take regular cash payouts using a low-risk covered call option strategy. He also contributes a weekly column to the Wealth Daily e-letter. To learn more about Briton, click here.
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