Will there be a share price surge in 2020?

By Paul Gambles

Canada’s fourth-largest bank, BMO, recently forecast that 2020 could see record highs on the Toronto Stock Exchange. So, is now the time to go big on shares?

BMO’s chief strategist certainly thinks so. His suggestion would mean a 7.4% rise from its level on December 11th, giving the caveat that this would depend on positive macroeconomic forces remaining in the US.

The rationale behind this is that US employment is at its lowest in half a century. Its economy has been expanding for over a decade and inflation is low. Consequently, Canadian equities would offer good value-for-money compared with south of the border. The BMO strategist believes this effect will be compounded because Canadian earnings are expected to be relatively low, leaving room for the TSX to under-promise and over-deliver.

Similarly, banks such as Barclays, Goldman’s BoA and SocGen have forecast significant rises in the S&P 500, they see this as a short-lived melt-up before there’s a meltdown. It seems to me that they’re anticipating an end to the slowdown in global growth, based on the assumptions of low US unemployment rates, easing of trade disputes and the effects of central bank interest rate cuts taking effect.

The only issue I have with all this is… well just about everything.

In fact, we’re currently experiencing a huge disconnect between market conditions and economic reality. US unemployment data look exceptional on paper, but there are plenty of reasons to believe that not only don’t unemployment numbers mean what they used to mean, they’re also too good to be true. You don’t have to scrape far beneath the surface to uncover evidence that, while fewer people are out of work, the number of well-paid jobs has actually decreased. Also, there’s a growing discrepancy between the official data and private payroll data (such as that supplied by ADP). Of course, the official data could be right – expect that even the official data don’t claim that – they not only revise it so much on a monthly and quarterly basis that the initial releases are virtually meaningless, they also release a ‘benchmark adjustment’ in the first half of the following year, for all the double counting and overestimating during the year – which might just indicate that 1 in every 5 American jobs reported to have been created each year, never actually happened!

Better indicators of economic health are manufacturing and services output, which are both down in major countries. Worse still, China – the global economy’s great saviour in 2008-2009 – is experiencing huge problems. Over there, producer price inflation has slumped, not only impacting local corporate profits but also handcuffing any attempts to reflate the global economy. Its rate of credit creation slowed in October far more than the PBOC had expected, hitting its weakest pace since at least 2017. Seemingly, even with the central bank throwing the kitchen sink at bank lending, China’s economy isn’t yet getting going again – even in the country where policymakers are able to exert the greatest influence.

Not only that, trade disputes are not the cause of the slowing global economy: they are merely a symptom. If we look back throughout history, we can see that trade disputes arise as a reaction to a depressed global trading economy., not the other way around.

Then we come to the central bankers – a significant export item for Canada! The last ten years have shown us quite clearly that their interest rate policies have virtually no effect on bank interest rates, which are mainly market-driven. Consequently, they have a tiny effect on the economy, yet remain delusional that they can change the world with a single decision. Stephen Poloz may manage to get out in time – but his replacement next June will face major challenges and elevated expectations.

In most major stock exchanges, prices have become disproportionately higher than companies’ earnings. The price-earnings ratio for the S&P 500 is verging on becoming bubble status. This makes it difficult to justify any further surges in stock prices.  BMO’s rationale that low earnings offer for value for money because they might be expected to improve sounds more like wishful thinking than rational economic analysis. Of course, wishful thinking can come true but we’d rather watch for evidence of this. 2/3 of global manufacturing indicators were in decline in November (up from 54% in both September and October – if everything in the economic garden is rosy, then depleted inventories will quickly need to be re-stocked and the signs of this should start coming through pretty soon).

Perhaps an even more stark indication is the breakdown in the relationship between equity markets and the price of copper – from the setback that both encountered at the end of May, the S&P 500 has bounced almost 15% whereas the price of copper, seen as a great indicator of the market’s temperature, has gone nowhere.

Meanwhile, the prices of industrial commodities, which in many ways help to indicate the real strength of the economy, have generally tried but failed to rally in recent months.

When you add all that to the geopolitical tensions we’ve been experiencing over the last few years, it’s hard to see how stock markets can carry on surging. We’ve seen how markets jump as soon as Donald Trump types a tweet; the reaction to any hint of a US-China trade agreement/dispute; the if, when and how of Brexit; and attacks on major oil fields but unless the downward pull of macro-economic gravity reverses direction, markets are departing further and further from reality on increasingly dubious precepts. This can continue for a while, enabling the surge BMO expects; or the melt-up Barclays, Goldman, BofA et al are hoping for. However, castles built on sand are at a high risk of collapsing at some point. For now, markets seem happy to respond positively to Trump tweets, central bank promises and even the expectation of more stimulus in the US election year. This enthusiasm is unlikely to stop at the border but it’s really a coin flip as to whether there’s time for the major melt-up to happen and for investors to take advantage before the plunge. I don’t think coin flips are the right basis for investment decisions and at best, informed coin flips are where we’re at in manipulated markets driven mainly by sentiment.

MBMG Group is an advisory firm that assists expatriates and locals within the South East Asia Region with services ranging from Personal Advisory, Insurance Services, Private Equity, Accounting & Auditing, Legal Services, Property Solutions, and Estate Planning.

 

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