Time for another round of predictions?
Byron Wien was once among the most-famous investment strategist in the world and he co-authored the seminal book Soros on Soros.
The 87-year-old has largely faded from public view but resurfaces from time to time and his annual list of Ten Surprises always gets headlines. Last year his list extended to 14 and wasn't released until early January. We hope he's back for another edition soon but in the meantime, let's have a look at how he did this year.
The weakening world economy encourages the Federal Reserve to stop raising the federal funds rate during the year. Inflation remains subdued and the 10-year Treasury yield stays below 3.5%. The yield curve remains positive.
Would this have really been a surprise? He was right that they stopped but didn't see the total reversal. Ten year yields peaked at 2.7% in January of last year and the yield curve did invert.
Partly because of no further rate increases by the Federal Reserve and more attractive valuations as a result of the market decline at the end of 2018, the S&P 500 gains 15% for the year. Rallies and corrections occur but improved earnings enable equities to move higher in a reasonably benign interest rate environment.
The S&P 500 is up 28% year-to-date largely because of Fed cuts and continued multiple expansion. Earnings haven't improved.
Traditional drivers of GDP growth, capital spending and housing, make only modest gains in 2019. The expansion continues, however, because of consumer and government spending. A recession before 2021 seems unlikely.
These all start to tie together and get back to the Fed cutting rates. Consumer and government spending were certainly the drivers of GDP growth but housing was a tailwind as well.
The better tone in the financial markets discourages precious metal investors.Gold drops to $1,000 as the equity markets in the United States and elsewhere improve.
Gold never dropped more than $10 below the year-opening level of $1280. Instead, Fed and other central bank easing boosted it to $1480.
The profit outlook for emerging markets brightens and investor interest intensifies because the price earnings ratio is attractive compared to developed markets and historical levels. Continuous expansion of the middle class in the emerging markets provides the consumer buying thrust for earnings growth. China leads and the Shanghai composite rises 25%. The Brazil equity market also comes to life under the country's new conservative leadership.
The Shanghai Composite is up 22% year-to-date and the Bovespa up 34%. Great calls.
March 29 comes and goes and there is no Brexit deal. Parliament fails to approve one and Theresa May, arguing that a change in leadership won't help the situation, remains in office. A second referendum is held and the U.K. votes to remain.
This is all wrong, but it's certainly a reminder of how uncertain Brexit was going into the year, and how hard it is to predict the future.
The dollar stabilizes at year-end 2018 levels and stays there throughout the year. Because of concern about the economy, the Federal Reserve stops shrinking its balance sheet, which is interpreted negatively by currency traders. The flow of foreign capital into United States assets slows because of a softer monetary policy and a lack of need for new capital for business expansion.
The dollar was stable but the Fed expanded its balance sheet and it hasn't hurt the currency, at least not yet. The flow of foreign capital into the US has been relentless this year.
The Mueller investigation results in indictments against members of the Trump Organization closest to the president but the evidence doesn't support any direct action against Trump himself. Nevertheless, an exodus of Trump's most trusted advisors results in a crisis in confidence that the administration has the people and the process to accomplish important goals.
There certainly wasn't an indictment against Trump.
Congress, however, with a Democratic majority, gets more done than expected, particularly on trade policy.Progress is made in preserving important parts of the Affordable Care Act and immigration policy.A federal infrastructure program to be implemented in 2020 is announced.
No infrastructure plan was announced but it finally looks like USMCA is going to get done.
Growth stocks continue to provide leadership in the U.S. equity market. Technology and biotech do well as a result of continued strong earnings. Value stocks other than energy-related businesses disappoint because of the slowing economy.
This was close to perfection. Growth certainly led the way and tech stocks had a sensational year. Value stocks disappointed but energy stocks were trashed.
Geopolitical tensions increase. Iran continues to destabilize the Middle East and Kim Jong Un fails to live up to his North Korea denuclearization promises. Secretary of State Pompeo and National Security Advisor Bolton make statements indicating the United States may take pre-emptive action in both places, thereby causing one of several sharp market sell-offs. But in spite of hostile rhetoric, the United States does not go to war with anyone as we approach the 2020 election. Trump's tough talk on some issues like trade works, however, and leads to successful diplomatic negotiations on national security.
North Korea was fairly low-key this year. This is a reminder that fears about the area were higher in early 2019.
In desperation China engages in ambitious infrastructure programs to bolster its economy. China grows at 6.5% real, but the increased debt causes concern around the world and has a negative impact on the renminbi.
China announces, "We want to be the world leaders in free trade."It sends envoys around the globe to negotiate better bilateral trade terms in order to offset the losses from the ongoing U.S. disagreements. Joint ventures in which foreign companies control the majority share are initiated in all sectors, from industrials and autos to raw materials. As China's influence around the world becomes greater, the U.S. further isolates itself.
China's strategy has been to preserve and strengthen the multilateral system, not to make bilateral deals, but the rest is arguably right.
The European Central Bank is forced to restart quantitative easing in response to a defiant Italy, a weakening Germany and Brexit.Thwarting expectations that Brexit would bring the rest of Europe closer together, Italy realizes that it can break all fiscal rules without any fear of punishment from the E.U. As a result, the Italian economy falls into recession, debt spreads surge and the ECB is forced to liquefy the system again.
The ECB certainly went back to bond buying but Italy wasn't a big factor and the big surprise might be that no one is flouting the fiscal rules.
If you just isolate his market predictions and ignore his ideas on how we get there and the political talk, he did very well. US, Chinese and Brazilian stocks all crushed it this year. He was off the mark on gold but I'll look forward to what he has to say about 2020.