Before I dive into these market surprises, I want to emphasize the importance of avoiding the urge to get caught up in day-to-day movements, and instead focus on economic data releases, earnings reports, and other economic factors!
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To help you do this, we are offering all readers a look into our just-released\u00a0January 2020 Stock Market Outlook report.<\/strong>
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This report will provide you with our forecasts along with additional factors to consider:<\/p>\n\n\n\n
- Should you stay bullish?<\/em><\/li>
- What sectors\u00a0show the best opportunity?<\/em><\/li>
- What industries within those sectors most merit your attention?<\/em><\/li>
- What produces U.S. optimism in the coming year?\u00a0<\/em><\/li>
- Year-end forecast for the S&P<\/em><\/li>
- Small-cap vs. large-cap returns<\/em><\/li>
- And much more.\u00a0<\/em><\/li><\/ul>\n\n\n\n
If you have $500,000 or more to invest and want to learn more about these forecasts, click on the link below to get your free report today!
IT’S FREE. Download the Just-Released January 2020 Stock Market Outlook<\/a>1<\/a><\/sup><\/strong><\/p>\n\n\n\n______________________________________________________________________________<\/p>\n\n\n\n
Market Surprise #1:\nStagflation<\/strong><\/p>\n\n\n\n
I think\nthere\u2019s a very low probability that we have runaway<\/em>\ninflation next year or anytime soon. But the Fed\u2019s accommodative stance \u2013 and\nseeming return to bond purchases (QE) \u2013 could result in higher inflation and\ninflation expectations, which could drive longer-term interest rates up. This\nscenario could inspire the Fed to raise rates, too. <\/p>\n\n\n\n
A\nnegative surprise, in this case, would be if interest rates start going up while\ncorporate earnings start going down. Throughout history, market losses have\noccurred when such dynamics (rising rates, falling earnings) are present. It\u2019s\nmore-or-less a perfect storm for equity markets. In the chart below, you can\nsee the effective fed funds rate over the last 50+ years, and it\u2019s easy to see\nthat rising rates have preceded recessions almost every time. <\/p>\n\n\n\n
Recessions Have Generally\nFollowed Periods of Rising Rates<\/strong><\/p>\n\n\n\n
![\"\"](\"https:\/\/zacksim.com\/blog\/wp-content\/uploads\/2022\/02\/5_image-1-of-1-1024x395.png\")
Source: Federal Reserve Bank of St. Louis2<\/sup><\/em><\/strong> <\/figcaption><\/figure>\n\n\n\nMarket Surprise #2: Geopolitical Strife <\/strong> <\/strong><\/p>\n\n\n\n
What if the trade war\nescalates to the point that it results in actual war? Or, in a less dramatic\nbut still consequential outcome, a Cold War with China? It is not unfathomable,\nin my view, to see this trade war with China extending throughout 2020 and\nresulting in the two sides drifting further and further apart. Considering\nconflict in the South China Sea, the U.S.\u2019s recent show of support for Hong\nKong, and President Trump\u2019s willingness to raise tariffs further, it\u2019s not\ndifficult to envision a scenario where economic cooperation is further severed.\nThe ripples through the global economy would be palpable. <\/p>\n\n\n\n
Then there\u2019s Iran,\nand the ever-present conflict in the Middle East. Recent reports indicate that\nthe Trump administration is weighing whether to send up to 14,000 more troops\nto the Middle East to counter Iran and up the ante on the pressure campaign.3<\/sup>\nOne wrong step could result in war. <\/p>\n\n\n\n
Market Surprise #3: A Frenzy of\nFree Trade Deals<\/strong><\/p>\n\n\n\n
The\nworld is currently tilting in the direction of protectionism. The U.S. and\nChina\u2019s trade war endures, the UK is actively trying to leave the free trade\nunion in Europe, and new tariffs are seemingly cropping up everywhere. But what\nif 2020 brought the surprise outcome of a frenzy of new trade agreements?<\/p>\n\n\n\n
On the\ntable is the ratification of the USMCA (the new NAFTA), a breakthrough between\nthe U.S. and China, and the UK striking a deal to remain in the free trade\nbloc. Multiple pressure points on free trade could be released, which in my\nview would translate into a material positive for stocks. Businesses may be\ninspired to make new investments in the wake of certainty, driving up cyclical\nactivity and pushing stocks even higher. <\/p>\n\n\n\n
Market Surprise #4: Market\nEuphoria<\/strong><\/p>\n\n\n\n
At\npresent, base case expectations are for \u2018muddle-through\u2019 growth of ~2% in the U.S.\nand the world, with another year spent worried that a recession is just around\nthe corner. <\/p>\n\n\n\n
But\nwhat if positive developments (better-than-expected growth, a trade deal) result\nin rapidly rising stock prices, which drives investor optimism higher in the\nprocess? That would create a scenario where the market is trading at a high\nmultiple and investors are optimistic about more gains ahead \u2013 a bad signal of\nthings to come, in my view. The end result might be a solid year of gains for\npart or all of 2020, but it would also probably mean the end of the bull market\naltogether, in my view. <\/p>\n\n\n\n
Bottom Line for Investors<\/strong><\/p>\n\n\n\n
As I\nmentioned at the outset of this piece, all of these scenarios have a low\nlikelihood of actually occurring, in my view. But as investors, it\u2019s always\nimportant to scan outlier scenarios and to try imagining \u2018unfathomable\u2019\noutcomes. Because in my opinion, it\u2019s these outlier scenarios that have the\nmost pricing power in equity markets, not the stories and events that are\nwidely known and \u2018priced-into\u2019 the markets.<\/p>\n\n\n\n
- What sectors\u00a0show the best opportunity?<\/em><\/li>