This conversation about the economy and markets is an excerpt from Barron’s recent Roundtable, published on Jan. 10. To read the entire discussion, click here.
Barron’s: OK, it’s time put you all on the spot. What’s your prediction for U.S. GDP and the market at the end of 2020? Mario, you first.
Mario Gabelli: We have a $90 trillion global economy. The U.S. is around 24%, reflecting the strength of U.S. economy and the dollar. Europe is about 22%; Japan, 6%. Europe is going to get a little stronger in 2020; Japan will be up a little bit. I’ll give developed countries 2% real growth, with the U.S. in that area, assuming we don’t have oil going to $100 a barrel. China will grow over 6% real. Overall, I see 3.2% real growth for global GDP.
The markets will be up in the first half of 2020 and turn down in the last 90 days of 2020, because there will be a lot more uncertainty for 2021. A major agreement between the Democrats and Republicans on an infrastructure bill could change that outcome. That is a missing ingredient in the U.S. economic outlook for 2021.
Todd Ahlsten: It’s going to be quite a volatile year. Multiple expansion will be tough to come by, so with earnings growth in the mid-single digits, a starting framework is a mid-single digit year [for stock returns].
Sonal Desai: For 2020, I’m looking at 2.5% to 2.75% [real gross domestic product growth], and agree that the VIX [the Cboe Volatility Index] will go up for a variety of reasons, political and otherwise. It takes very little to topple from a steep valuation; I would have to agree, based on where your market appreciation comes from, that mid-single digit returns on stocks sound right.
Abby Joseph Cohen: With GDP at that level, what sort of interest rates do you expect?
Desai: The Fed is going to keep short-term rates anchored where they are, and I continue to believe that this is a mistake, as monetary policy is too accommodative for the state of the economy. I expect the long end [of the U.S. Treasury market] to sell off a bit, on the back of inflation, despite the deflationary or disinflationary consequences of technology. The strength of labor markets argues for that. Finally, while goods price inflation has remained muted, that certainly is not the case for asset price inflation.
The R-word came up quite a bit in our discussion last year, but no one has mentioned recession today.
William Priest: A recession is defined as two consecutive quarters of negative real GDP. The sum of the growth in the workforce and growth in productivity has to be a minus sign. It’s almost impossible to get that in the U.S. right now. I think U.S. real GDP growth will be around 1.5%, with overall global real GDP growth at 3% or a bit less.
Meryl Witmer: The consumer is in good shape; consumers will continue to spend, and the Fed looks like it will be very cooperative. We usually say slow growth is nirvana for the market, but with valuations this high, I would not expect a robust year for the market. Everything I look at is trading where it should trade in 1½ or 2 years from now, which means valuations are 15% to 20% too high. We could have a really sideways-to-down market; if something happens to cause fear, it could really topple. Then, maybe we’d get some good valuations again. It’s good to have some cash around. Cash levels for retail investors are still kind of high, but down from last year.
Henry Ellenbogen: I see modest real GDP growth in the 1.5% to 2% range. I agree with Meryl that the consumer is strong and the markets are relatively full. I am the opposite of Mario—I think the markets are going to be weak until we have some certainty, not only on the presidential election, but also on whether the Democrats take the Senate. The three swing factors for the year are the Fed, China, and the election. The Fed will remain accommodative. I don’t think China has forgotten what’s happened over the last couple of years. And there will be clarity around the election and whether there is a change in fiscal policy and taxes.
Read the entire Barron’s 2020 Roundtable here.
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