More 2020 Forecast
December 31, 2019
Monetary easing this year from the Fed, Emerging Markets and fiscal stimulus from EM Asia in particular, has arrested the trade-induced slide in global growth. The recent Q4’19 rally in the SPX started when global manufacturing PMI began forming a base. As noted in the past three editions, we think we’ve seen this before and expect global manufacturing PMI to run above trend sometime in the second half. The rally to date looks almost identical to past cycles and using history as our guide, we’d expect equities to continue advancing on sequential improvement in global manufacturing PMI data. And based on the amount of monetary and fiscal fuel that exists, we’d expect to see several quarters of sequential improvement. We expect the manufacturing PMIs will inflect back to trend by late Q1 and this will change investor perception about the durability of the cycle. This will likely encourage equity flows, but not uniformly. We think new entrants will look for ‘underpriced’ assets and markets that have underperformed to date and prefer International Equities (Japan, EM and Eurozone in that order) and US value sectors during the first ~6 months of 2020. As noted yesterday, the cheapest US value sector is Energy. There are always risks with US-China trade probably still at the top of the list. We also think China growth needs to stabilize at ~6% in order for EM to work. And the emergence of a progressive Democrat nominee this spring/summer would probably encourage a higher risk premium for equities and Energy in particular