Every year at this time I make some predictions for the year ahead. I base these on current trends and try to project what is likely to happen if those patterns continue. Sometimes they do, but it only takes one unpredicted event to upset all the calculations. That may have happened last week, with the U.S. killing of Iranian general Qassem Soleimani. To use one of U.S. President’s Donald Trump’s favourite expressions, “We’ll see.”
Last year, we were faced with a great deal of uncertainty, so I confined myself to two forecasts. The first was dead wrong – I predicted the Toronto Stock Exchange would outperform the S&P 500. My rationale was that the Canadian energy and banking sectors would bounce back from their dreadful performances in 2018, while in the United States the positive impact of the Trump tax cut would dissipate. In the end, both indexes did well, but the S&P 500 outdistanced the S&P/TSX Composite Index by a wide margin.
My second prediction was more on the mark. I said that bonds would fare better than expected, owing to a slowdown in the pace of rate increases. The direction was correct but too conservative. I did not expect the U.S. Federal Reserve Board to do a complete about-face and cut rates three times. The end result was a gain of almost 7 per cent in the FTSE Canada Universe Bond Index.
That was 2019. Now let’s look ahead to 2020. Here’s what I expect to happen.
Stocks will be modestly higher. If history is any guide, the bull market should continue through 2020 but at a more modest pace. In the 17 U.S. presidential election years since 1952, the S&P 500 gained ground in 14 of them. But a repeat of last year’s advance of almost 29 per cent in the S&P is highly unlikely. Back-to-back years of 25-per-cent-plus gains have happened only three times since 1930. I look for the S&P to be ahead by 7 per cent to 9 per cent at the end of the year. The S&P/TSX target is 4 per cent to 6 per cent, based on lower GDP growth projections for our economy.
Interest-sensitive stocks will falter. We saw some unusual gains in utilities and real estate investment trusts (REITs) in 2019, mainly owing to the turnaround in the Fed’s interest-rate policy. But the rally was overdone, as we’re now seeing. The S&P TSX Capped REIT Index fell 3.9 per cent between Dec. 10 and Jan. 3, while the Capped Utilities Index slipped 1.7 per cent in the same period.
This isn’t the end of the world by any means. Most investors buy these securities for their high yields and the cash will continue to flow. But anyone who is expecting a repeat of the capital gains of 2019 will be sadly disappointed.
No recession – yet. The U.S. stock market looks overpriced, but Mr. Trump can be expected to do everything in his power to keep the good times rolling until after the November election. Once that’s out of the way, it’s anyone’s guess. The Goldilocks economy has to come to an end at some point. If Bernie Sanders or Elizabeth Warren wins in November, it won’t take long.
Gold will do well. North Korea is making new threats and the Middle East powder keg may be about to blow, with Iran threatening large-scale retaliation in the wake of Gen. Soleimani’s death. Gold feeds off the world’s miseries and jumped US$24 on Friday. It should continue to move higher if tensions escalate.
Bonds will stagnate. The Federal Reserve Board has indicated no rate changes are planned in the near future and the Bank of Canada is in a similar position. Without any movement from the central banks, bond prices will wallow in the first half of the year. But if recession fears start to build as the year wears on, the Fed may go back to cutting again, changing the whole scenario.
With that, and with crossed fingers, I wish everyone Happy New Year.
Gordon Pape is editor and publisher of the Internet Wealth Builder and Income Investor newsletters.