Investors appear willing to grant a mulligan to the global economy and corporations/stocks negatively impacted by the outbreak/devastating effects of the coronavirus in China and elsewhere. While no one knows for sure how long it will take to control the coronavirus, it remains clear that the global economy, including China, were and remain on the cusp of accelerating growth once contained, which we still expect to occur over the next few months.
We expect the stock market to remain volatile during this period of uncertainty but we remain confident that global growth will improve sequentially through 2020 into 2021 benefitting from an absolutely huge amount of monetary stimulus virtually everywhere, major trade deals finally enacted, additional fiscal stimulus to offset current weakness, some regulatory reforms finally being implemented in key economies, containment of the coronavirus in China, and finally a return to production of the Boeing (NYSE:BA) 737 Max.
The financial markets are confused right now, not knowing if we are entering a sharp/extended slowdown led by China, or an eventual acceleration in growth. Ed Hyman, the best economist on the Street and a long-time friend, believes that China is not growing at all at this moment while the U.S is doing just fine. But Ed fails to discuss whether this is just a near term pause in China’s long-term wonderous growth story once the virus is contained. We are confident that this pause is just temporary.
We don’t believe that the U.S economy will be hurt much by China’s slowdown unless it extends much longer than we currently believe which would then jeopardize our supply lines to some degree. On the other hand, we are gaining more confidence by the week that Boeing will get the go ahead before the summer to begin production once again of the 737 Max. If so, this alone could add 0.5% to our GNP annualized growth rate over the third and fourth quarters of 2020 and even more next year as production is ramped up. While we may not see the real benefits of Phase 1 of the trade deal with China until the coronavirus is contained, we do expect our GNP to benefit by 0.5% once the USMCA alone is fully enacted which should also occur in the second half of this year, too. The net of these two items will boost our growth rate by over 1% in the last two quarters of 2020 to potentially well over 3% annualized.
Then, there is China. It remains our base case that the coronavirus will be contained in a matter of months which would then allow China’s growth to reaccelerate, Phase 1 of our trade deal to kick in, and growth worldwide to accelerate as well. Net net, we expect the U.S. GNP growth rate to be hard pressed to exceed 2% over the first two quarters even though consumer demand will remain strong; inventories will start to be rebuilt after being liquidated in the fourth quarter; and the trade deficit will decline especially if imports from China weaken as we now expect. Offsetting these items will be the near-term slowdown in global growth led by China and the curtailment of production at Boeing which will penalize growth by at least 0.5% alone.
But then, we expect a sharp acceleration in growth to well over 3% for the third and fourth quarters for all the reasons mentioned above. Won’t that play well into our national elections come November?
The bottom line is that we believe that our stock market remains undervalued today. Let’s break this down by the first half of 2020 followed by the second half. While we have slightly reduced our growth and earnings assumptions for the first half of the year as global growth slows, offsetting lower earnings than we initially forecasted will be much lower interest rates than we envisioned even a few weeks ago.
Remember that the stock market is far more leveraged to interest rates than to earnings. No doubt all monetary authorities will keep the spigots wide open until there is some resolution on the coronavirus. Just read the Fed commentary which came out Friday which basically supports this view. In addition, China has now added close to $300 billion of additional monetary stimulus just over the last few weeks.
All stocks markets/risk assets will be propped up/supported by all of this monetary ease. Bonds will do well, too. Then, if we are correct, China’s economy will recover rapidly once the coronavirus is contained which we still expect over the next few months. China’s government will add fuel to their economy by significantly expanding its fiscal policy/spending too. So, while growth will slow materially near term as we expect in China, we are forecasting a resumption to 6% growth before midyear well into 2021.
Our bottom line is that the stock market will be propped up by low interest rates during the first half of the year and then will continue moving higher in the second half of the year as earnings accelerate big time as the U.S and China’s economies pick up steam along with Mexico and Canada followed by Japan, India and the Emerging Markets. Europe will remain relatively weak until a trade deal is reached with the U.S and financial/regulatory reforms are passed.
Our objective for the U.S stock market remains 3400-3600 by the end of the year. We continue to factor into our assumptions that Trump will do anything in his power to bolster the economy and stock market to support his reelection come November. It certainly helped him that the Impeachment proceeding against him ended last week in the Senate as we expected. We feel that this whole process by the Democrats to kick him out of office since he was elected President will not serve them well this year such that the Republicans will remain in control of the Presidency/Senate while also picking up seats in the House. Expect Trump to counter the Democrats with a new tax reform bill to benefit the middle/lower classes to the detriment of the wealthy; a new infrastructure bill financed with 20-50-year paper; and major healthcare legislation aimed at lowering costs, especially for drugs.
Our portfolios remain concentrated in technology, especially the semis; global industrial and capital goods companies; financials, especially the largest/strongest U.S global banks; retail with a emphasis on housing; some healthcare companies finalizing highly additive mergers; low cost, high yielding industrial commodity companies, especially in copper; and many special situations. The common thread is that we invest in great managements with winning long-term strategies who are generating huge free cash flow, after large spending to remain market dominant, being used to benefit their shareholders either through higher dividends and/or large buybacks. We own no bonds expecting the yield curve to steepen later in the year and are flat the dollar which is now benefitting with a safe haven status along with the Japanese yen.
Remember to review all the facts; pause, reflect and consider mindset shifts; turn off the pundits/experts; look at your asset mix with risk controls; do independent research and… Invest Accordingly!