Outlook

By Guest Blogger Ryan Lewenza

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Prior to joining Turner Investments I was an Investment Strategist for our firm (Raymond James) and a major Canadian bank. An “Investment Strategist” is an economist and financial analyst in one. Unlike a stock analyst, who focuses on a particular industry or sector, an Investment Strategist instead looks at the big picture and forecasts things like the economy, interest rates, the equity markets and which sectors will out/underperform. For financial geeks like myself, an Investment Strategist is the dream job as it looks at the whole system rather than the individual parts and the learning is endless.

So this week I put on my Investment Strategist hat and present my major calls for 2020. Let’s hope I have as much success as 2019. https://www.greaterfool.ca/2019/12/21/how-did-we-do/

First, it all comes down to the economy, which I see stabilizing this year, and likely picking up in the second half. Critical to this is Phase One of the US/China trade deal, which Trump said would be signed by mid-January. While the deal could provide a small boost to exports and GDP, the larger benefit of this deal would be removing a lot of uncertainty that has weighed on businesses and the economy in 2019. In particular, I see manufacturing and capital investment rebounding this year as a result of the trade deal, which should provide a boost to the US/global economy.

While growth in the labour market should slow in North America (unemployment rates are already at historic lows), I see the labour markets remaining strong this year, which should continue to support robust consumer spending.

Overall I see the US/global economy doing better in 2020 and see low odds of a recession. In trying to assess the odds of a recession we use the indicators in the table below and currently the majority of our key indicators point to low odds of a recession in 2020 (only manufacturing is worrisome but this should rebound on the US/China trade deal).

Turner Investments Recession Monitor List

Source: Turner Investments
Recessionary; Expansionary; = Neutral

Moving to the fundamentals, I see corporate earnings growth improving, which should propel stocks higher again this year. After a strong year of earnings growth in 2018, aided by the cut to US corporate tax rates, earnings growth slowed to a crawl in 2019, due to the slowdown in the US/global economy and the trade uncertainty. With my expectations for stronger economic growth and the improving trade front, I see a reacceleration of earnings in 2020.

Currently analysts expect S&P 500 and TSX earnings to surge 17% and 15%, respectively, in 2020. Stock analysts are notoriously overly optimistic (they buy rose coloured glasses in bulk), so based on my models I see earnings growth coming in at half the consensus estimates (i.e., 7-8% Y/Y). This projected earnings growth will be critical to the equity markets this year given elevated stock valuations.

With the huge gains in 2019, stock valuations (e.g., P/Es) have expanded significantly, with the S&P 500 P/E increasing from 15x in early 2019 to 20x currently, for example.
Some worry the elevated valuations for stocks will result in a disappointing year for stock returns. But with inflation low, dovish central banks, and low odds of a recession, I think this concern is overstated.

That doesn’t mean we won’t see bouts of volatility and sell-offs occurring this year. In fact, I see the potential for higher volatility this year, relative to 2019, due to where we are in the business cycle. But when all is said in done I see further gains this year, with much of it depending on the outlook for corporate profits.

Lastly, from a regional perspective I’m most bullish on the Canadian, US and emerging markets in 2020.

S&P 500 Earnings Are Expected to Rebound in 2020

Source: Bloomberg, Turner Investments

The final thing I consider in developing our outlook are the technicals for the major equity markets.

Below is the long-term chart of the S&P 500 and she’s a beaut! Frankly, I don’t understand how anyone who looks at the charts could be bearish. This is a textbook bullish trend.

From the chart there are three key bullish observations. First, the S&P 500 remains in a well-defined uptrend (most important). Second, the S&P 500 is above its rising 200-day moving average. Third, note the clear long-term pattern of consolidations (2011, 2015, and 2018), followed by breakouts. The cardinal rule of technical analysis is “to invest with the trend”, and that’s exactly what we’re doing. Everything else is just noise.

S&P 500 Technicals Remain Very Bullish

Source: Stockcharts.com, Turner Investments

When developing my outlook for the year ahead I spend a lot of time thinking about where I could be wrong and reading research that is at odds with my personal views. Confirmation bias is a strong behavioural bias where people seek out information that aligns and supports their existing views and beliefs. I try to counter this bias by actively seeking out information and views that run contrary to my thinking.

In that vein I see the following factors that could prove my positive outlook wrong: 1) the US/China trade deal is signed but not adhered to and therefore trade tensions escalate; 2) geopolitical events like the Hong Kong protests or the US/Iran situation deteriorates further; 3) 2020 will mark the 11th year of this expansion and I underestimate how close we are to the end of this business cycle; and 4) a surprise US election outcome like a Warren or Sanders win (while unlikely that would probably be the death knell of this bull market).

Overall, I see more positives than negatives for 2020 and therefore see more gains in store for this year. But investors need to be prepared for more volatility and expect more muted gains compared to the awesome 2019.

Ryan Lewenza, CFA, CMT is a Partner and Portfolio Manager with Turner Investments, and a Senior Vice President, Private Client Group, of Raymond James Ltd.