- According to a CNBC report citing Deutsche Bank data, global stock markets added $17 trillion in value this year. A year back, most economists saw dismal stock market returns in 2019. Some pessimists predicted a stock market crash and a recession for 2019.
- However, the apocalypse never arrived. Instead, US stock markets soared to a record high. So, how did most economists get it so wrong for 2019? We’ll discuss in this article.
The stock market crash that never happened
US stock markets have been strong this year, and the Dow Jones Index and S&P 500 are trading near their record highs. Barring periods of trade war escalation, US stock markets were strong even as some economists predicted a stock market crash. Goldman Sachs saw low single-digit returns from the S&P 500 in 2019.
To be sure, economists got it all wrong for 2018 as well. They expected it to be a year of synchronized global growth. However, as we got into the fourth quarter of 2018, sentiments turned somber. Some started talking of a synchronized global slowdown instead. Read Global Economic Mood: ‘Synchronized Growth’ to a Slowdown for more insights.
Dow Jones had the best January in three decades
Earlier this year, we noted that the economic outlook wasn’t as gloomy as the consensus view suggested. The fourth quarter sell-off was overdone and US stock markets rebounded in January. Incidentally, the Dow Jones Index (DIA) had the best January in more than 30 years. President Donald Trump, who seldom misses highlighting such milestones, promptly tweeted about the feat.
Simply put, some of the Dow Jones’ 2019 returns were due to the overdone Q4 2018 sell-off. Meanwhile, after a strong January, some economists were still not convinced about the rally.
Goldman Sachs, for instance, felt that markets front-loaded their gains and there wasn’t more upside. As it turned out, the Dow Jones Index continued its good run even as most economists were not convinced about the rally’s strength.
The Fed came to the rescue, too
So, while the initial part of the stock market rally was due to the fact that markets repriced themselves after the Q4 sell-off, other factors too contributed to the rally. To begin with, the US Federal Reserve abruptly halted its rate hikes. Notably, the Fed’s tightening contributed to the stock market sell-off in Q4 2018.
Then, as the year progressed, the Fed became even more dovish and eventually lowered rates by 25 basis points in July. Two more rate cuts followed and the Fed lowered rates by 75 basis points this year. That said, the Fed has now stayed put on more rate cuts.
Stock markets eventually reflect the economy
Many economists predicted a recession for 2019. However, US economic growth is resilient and, in fact, shattered expectations in all three quarters. Economists, in general, were too bearish on the US economic growth outlook. However, the employment market has been quite strong. Although, monthly job additions slowed down from the levels that we saw in 2018.
Also, the US consumer continued with their unending consumption appetite. While the manufacturing sector and corporate investments sagged, they were offset by strong consumption. Ultimately, and as old-timers would tell us, stock markets are a barometer of the economy. As the US economy showed resilience, stock markets marched higher. As things turned out, Trump was right on the US economy!
Chinese economy might have bottomed out
China’s economic slowdown was another potent risk for markets in 2019. In a still interconnected world, despite Trump’s many trade wars, US stock markets cannot be immune to the slowdown in the world’s second-largest economy.
Chinese economic growth faltered in the first three quarters of 2019. Of late, most economic indicators suggest that the country’s economy might have bottomed out. Also, easing concerns over China’s economic slowdown helped stock markets in the last couple of months.
Trade deal became stock markets’ Santa
This month, the US and China agreed to phase one of the trade deal. However, the deal is yet to be signed. And we don’t know much about the fine print especially on the quantum of China’s proposed purchase of agricultural goods. Nonetheless, phase one trade deal helped buoy sentiments.
Notably, US stock markets crashed in May after Trump raised tariffs on Chinese goods accusing the country of reneging. Nonetheless, it seems sanity finally prevailed and the two countries have found some sort of common ground. Phase one of the US-China trade deal coupled with the USMCA helped buoy markets this month.
Stock markets: What to expect in 2020
2019 was always expected to be a year of earnings cliff. While that indeed turned out to be the case but overall corporate earnings outperformed expectations in 2019. Here again, things weren’t rosy and earnings still fell year-over-year but they weren’t as gloomy as some forecasted. Also, the earnings outlook for 2020 looks strong.
Looking forward to 2020, there are still plenty of geopolitical risks. Also, we have the 2020 presidential elections. From a valuation perspective, stock markets aren’t looking very cheap. According to a FactSet report, the S&P 500 (SPY) is valued at a forward PE of 18.0x. This is higher than the five-year average of 16.6x and the 10-year average of 14.9x.
However, in the same breath, analysts expect 2020 earnings growth to be higher than the historical average. FactSet expects 2020 earnings growth at 9.6% for S&P 500 companies. The ten-year average stands at 9.1%.
Simply put, stock markets are trading at a higher valuation looking at historical multiples. Analysts expect earnings growth to be high in 2020 after the cliff this year. All said stock markets might not repeat this year’s stellar performance next year. Read Dow Jones 2020 Outlook: What’s Next after Trade Deal for more insights.
What’s the consensus view for 2020?
As we head into 2020, the consensus view is not positive and most analysts see a flattish market at best. That said, of late many analysts have upwardly revised their targets for S&P 500 after the trade deal. However, some still see a stock market crash next year. Read Market Crash Imminent, Say Super Rich: Time to Panic? for more insights.