By Byron R. Wien and Joe Zidle
Byron R. Wien, vice chairman together with Joe Zidle, chief investment strategist in the Private Wealth Solutions group at Blackstone, recently issued their list of Ten Surprises for 2020. This is the 35th year Byron has given his views on a number of economic, financial market and political surprises for the coming year.
Byron defines a “surprise” as an event that the average investor would only assign a one out of three chance of taking place but which Byron believes is “probable,” having a better than 50% likelihood of happening.
Byron started the tradition in 1986 when he was the chief U.S. investment strategist at Morgan Stanley. Byron joined Blackstone in September 2009 as a senior advisor to both the firm and its clients in analyzing economic, political, market and social trends. In 2018, Joe Zidle joined Byron Wien in the development of the Ten Surprises.
Byron and Joe’s Ten Surprises for 2020 are as follows:
1. The economy disappoints the consensus forecast, but a recession is avoided.
Federal Reserve Chair Powell lowers the Fed funds rate to 1%. Without a comprehensive trade deal in hand, President Trump exercises every executive authority he has to stimulate growth and ward off recession. He cuts payroll taxes to put more money in the hands of consumers.
2. Inequality and climate change become important election themes, but centrist ideas prevail.
The House of Representatives sends articles of impeachment to the Senate, but Donald Trump is not convicted or removed from office. Enough information is revealed in the proceedings to cause some of his supporters, as well as many independents, to throw their support to liberal candidates in 2020 state races. The Democrats take the Senate in November.
3. There is no comprehensive Phase Two trade deal that limits China’s ability to acquire intellectual property.
National interests result in the balkanization of technology. The development of separate standards for 5G and other tech hardware proves to be bad news for the future of world economies. The move toward “decoupling” gains traction in negotiations with China. U.S. economic co-dependence with China erodes. Both China and the U.S. keep their hands off Hong Kong and let the protest settle down by itself.
4. The prospect of a self-driving car is pushed further into the future.
A series of accidents with experimental vehicles causes a major manufacturer or technology company to issue a statement that it is no longer developing self-driving technology.
5. Emboldened by the pain of economic sanctions, Iran takes advantage of America’s unwillingness to intervene and steps up acts of hostility against Israel and Saudi Arabia.
The Strait of Hormuz is closed and the price of oil (West Texas Intermediate) soars to over $70/barrel.
6. Even though some observers believe valuations are stretched, a surge in investor enthusiasm pushes the Standard & Poor’s 500 above 3500 at some point during the year.
Earnings increase only 5%, and S&P 500 multiples remain elevated because monetary policy is easy and investors become more comfortable that intermediate interest rates will rise slowly. Volatility increases and there are several market corrections greater than 5% throughout the year.
7. Big tech companies face growing political scrutiny and social blowback.
Once the market leaders, certain FAANG stocks underperform and the equal-weighted S&P 500 outperforms. A proposal to break up the largest social media platforms and increase regulation and government oversight gains popularity. This has greater success than prior government efforts against Apple, Microsoft and IBM, because it has widespread support from the American people. A millennial in New York City puts a phone down and makes eye contact with another human and finds it non-threatening and refreshing.
8. Having secured a workable Brexit deal, the United Kingdom turns out to be the winner in its divorce from the European Union.
The equity market rises and the pound rallies. The U.K. benefits from a long transition period, and growth exceeds 2% as foreign direct investment resumes now that the outlook is clarified. The EU economy remains soft, and European markets other than the U.K. underperform the U.S. and Asia.
9. The bond bubble starts to leak, but negative rates continue abroad.
Even though the U.S. economy is slowing, the 10-year Treasury yield approaches 2.5% and the yield curve steepens. Japan and China pull away from the Treasury auctions. Rather than economic fundamentals or inflation, supply and demand drive yields higher.
10. The problems with Boeing’s 737 Max are fixed and deliveries begin.
The plane becomes a mainstay around the world, enabling airlines to operate more efficiently and increase profits. The stocks become market leaders.
Every year there are always a few Surprises that do not make the Ten, because we either do not think they are as relevant as those on the basic list or we are not comfortable with the idea that they are “probable.”
11. Fears of an economic crisis in India are allayed.
The emerging markets continue to have uneven performance but India recovers from decelerating growth. The Modi government continues business-friendly growth reforms, the economy grows at 6% and the market rises 20%.
12. Artificial intelligence begins to be viewed as a paper tiger.
The AI jobs apocalypse fails to materialize, much as the Y2K bug failed to undermine the US economy 20 years earlier. Manufacturing jobs have already been automated and it proves harder to eliminate service jobs by using computer-based applications.
13. Economic problems in Russia intensify even though the price of oil rises.
As a result, social unrest begins to spread. Putin’s cozy relationship with his circle of oligarchs becomes an issue and his influence as a world leader diminishes. He attempts to maintain his stature on the world stage through a closer association with China. In spite of serious differences, China and Russia appear prepared to face off against Europe and the United States.
14. Populism and inward thinking continue to spread globally, particularly in emerging markets.
Anarchy and disharmony spread throughout the world, creating turbulence in financial markets everywhere. Investors turn away from emerging market local currency debt, forcing spreads higher.
15. North Korea agrees to suspend its nuclear development program after another meeting with President Trump, but does not give up its existing stockpile.
Kim Jong-un halts work on a long-range missile capable of reaching the United States. North Korea continues to be a threat, but not an imminent danger.
Lawton Retirement Plan Consultants, LLC (LRPC) Monday Morning Minute is crafted to provide decision-makers with important information about the economy, investments and corporate retirement plans in a format that allows a reader to consume the information in less than 60 seconds. As an independent, objective investment adviser, LRPC has access to many sources of research and shares the best and most relevant information with its readers each week.
Lawton Retirement Plan Consultants, LLC (LRPC) is a Milwaukee, Wisconsin-based independent, objective Registered Investment Adviser (RIA) providing investment advisory, fiduciary compliance, employee education, provider management and plan design services to employer retirement plan sponsors. The firm specializes in Socially Responsible Investment (SRI) strategies for retirement plans and is a pioneer in the field. LRPC currently has contracts in place to provide consulting services on nearly a half billion dollars in plan assets. For more information, please contact Robert C. Lawton at (414) 828-4015 or firstname.lastname@example.org or visit the firm’s website at https://www.lawtonrpc.com. Lawton Retirement Plan Consultants, LLC is a Wisconsin Registered Investment Adviser.
This information was developed as a general guide to educate plan sponsors and is not intended as authoritative guidance, tax, legal or investment advice. Each plan has unique requirements and you should consult your attorney or tax adviser for guidance on your specific situation. In no way does Lawton Retirement Plan Consultants, LLC assure that, by using the information provided, a plan sponsor will be in compliance with ERISA regulations. Investors should carefully consider investment objectives, risks, charges, and expenses. The statements in this publication are the opinions and beliefs of the commentator expressed when the commentary was made and are not intended to represent that person’s opinions and beliefs at any other time. The commentary does not necessarily reflect the opinion of Lawton Retirement Plan Consultants, LLC and should not be construed as recommendations or investment advice. Lawton Retirement Plan Consultants, LLC offers no tax, legal or accounting advice and any advice contained herein is not specific to any individual, entity or retirement plan, but rather general in nature and, therefore, should not be relied upon for specific investment situations. Lawton Retirement Plan Consultants, LLC is a Wisconsin Registered Investment Adviser and accepts clients outside of Wisconsin based upon applicable state registration regulations and the “de minimus” exception.