On Christmas Day in 2018, President Trump offered a striking market analysis:
“I think it’s a tremendous opportunity to buy. Really a great opportunity to buy.”
At that time, the U.S. stock market was experiencing a significant downturn. From September 20, 2018, to Christmas Day, the S&P 500 fell by nearly 20%, just shy of a bear market, marking a 20-month low.
Surprisingly, Trump demonstrated a knack for timing, pinpointing the market’s nadir. Over the following year, from Christmas Day 2018 to Christmas Day 2019, the S&P 500 surged by more than 36%.
In hindsight, the idea of buying during this downturn seems almost obvious. However, at that moment, it demanded significant conviction and courageous resolve.
It’s easy to see the right actions after the fact. Perhaps Trump even deserves consideration for a Nobel Prize in Economic Sciences for his acumen in timing the market plunge. More likely, he was aware that he had support from influential figures…
Following a call with the CEOs of the six largest banks on December 23, 2018, Treasury Secretary Steven Mnuchin organized a Christmas Eve call with the President’s Working Group on Financial Markets – commonly known as the Plunge Protection Team (PPT). The purpose was to discuss coordinated efforts to stabilize market operations.
Regardless, 2019 turned out to be an excellent year to invest in the S&P 500. But what lies ahead in 2020?
Gazing Into 2020
As the New Year approaches, we turn our attention to what’s ahead. It’s the perfect occasion to look through our insightful lens at the coming year and share our findings.
What we see is a mixture of new aspirations, paths, and even illusions just at the horizon, akin to storm clouds illuminated by warm sunlight. We recognize possibilities, challenges, despair, and also glimpses of hope and redemption.
Without a doubt, 2020 will unfold as it’s meant to, bringing both highs and lows. Each day will present its own unique balance of events.
But what essential insights can we gather as we prepare for another trip around the sun? What should we consider regarding stocks, the 10-Year Treasury note, gold, and more? Will collateralized loan obligations (CLO) be shaken by widespread corporate defaults? Are we headed towards societal upheaval? Will this year be the moment to challenge the Fed?
We’ll tackle some of these questions with humility. Predicting the future is often guesswork, much like Fed monetary policy. However, we recognize our limitations.
Our approach might seem straightforward. We steer clear of conventional forecasting methods, such as trend lines and data models, opting instead for a more intuitive method. We absorb a variety of information, then sift it through personal judgment to reach clear conclusions.
Before diving deeper, a brief disclaimer is in order. As noted by King Solomon:
“A fool also is full of words: a man cannot tell what shall be; and what shall be after him, who can tell him?” – Ecclesiastes 10:14
With that established, we sharpen our analysis. This year, we have a special insight prepared just for you. After careful consideration, we’ve distilled our findings for 2020 down to one essential piece of wisdom.
Vision 2020: One Essential Insight for the Year Ahead
The late Marty Zweig, in his book Winning on Wall Street published in 1970, observed:
“The monetary climate – primarily the trend in interest rates and Federal Reserve policy – is the dominant factor in determining the stock market’s major direction.”
Even five decades ago, it was apparent that the stock market functions under the influence of Fed policy. Decreasing interest rates and, more recently, quantitative easing (QE) inflate asset values, while increasing rates and quantitative tightening deflate them.
Zweig also simplified this idea into a mantra for Wall Street enthusiasts:
“Don’t Fight the Fed.”
This advice is indeed wise… most of the time. However, there are instances when trying to anticipate Fed policy can backfire.
For instance, on January 2, 2001, the S&P 500 opened at 1,320 while the federal funds rate stood at 6.5 percent. The very next day, the Fed began a series of rate cuts that would lower the rate to just 1 percent by June 25, 2003. Yet during this period, the S&P 500 dropped over 26 percent.
Similarly, on September 17, 2007, the S&P 500 opened at 1,484 with the federal funds rate at 5.25 percent. Following a similar path, the rate was slashed to almost zero by December 16, 2008, while the S&P 500 plummeted by over 38 percent.
These examples illustrate that adhering to the refrain, “Don’t Fight the Fed,” during these periods proved disastrous.
It’s evident that there are situations where one should challenge the Fed, and 2020 is one of those instances. Thus, our essential insight for the upcoming year is straightforward:
Challenge the Fed in 2020.
In the year ahead, the Fed will likely double down on its extreme strategies, further cutting the federal funds rate and injecting liquidity into the system. However, the approaches that yielded success in 2019 may fail spectacularly in 2020.
Remember, policymakers are human and can miss the mark. We believe that they already have. Based on this premise, we predict the following for 2020:
The S&P 500 will end the year down by precisely 32 percent. The yield on the 10-Year Treasury note will rise to 3.19 percent. Additionally, gold is expected to reach a new all-time high, surpassing $1,900 per ounce.
Here’s to a healthy and prosperous New Year!
Sincerely,
MN Gordon
for Economic Prism
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