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Peeking Into 2020 ?

At year-end 2018, there was terrifying 17 percent drop in the stock market during the fourth quarter, then economic datapoints weakened during the first half of 2019.  To make things worse, the political atmosphere was terrible, with Brexit, Mueller/impeachment, Korea and a very real trade war.  A recession looked inevitable at that point.  An inverted yield curve during the summer seemed to confirm this.  Fortunately, that was wrong!  Starting from a very low point, the stock market showed 29 percent improvement to all-time record highs.  Even gold is up 17 percent, the best performance in ten years

At year-end 2019, U.S. economic data is looking healthy enough to sustain a mildly bullish market.  Unemployment is at a fifty-year low.  Inflation is still tame.  Not surprisingly, personal income and consumer confidence are both rising.  Worker income is finally rising faster than prices.  Holiday retail sales was strong.  Small business confidence is up.  The durable goods orders suggest the weakening manufacturing sector seems to have finally stabilized.  This strong economy is fueled largely by a weak Fed and massive fiscal stimulus from continuous deficit budgets, as well as rising corporate profits.

Of course, there is always negative economic data, such as the Index of Leading Economic Indicators which has fallen for three straight months, for the first time since 2009.  The falling monthly trade deficit looks like good news at first, but it is due to rapidly falling imports, reflecting the trade war.  The ISM (non-manufacturing) Index is also signaling slower growth.  Still, the economy appears to be relatively stable for now.  In comparison, the stock market looks more overheated than the economy.  The Relative Strength Index says the stock market is 15 percent “over-bought.”

Investment giant Vanguard predicts a 50 percent probability of a 10 percent drop in 2020.  Famed market economist Ed Yardeni estimates corporate earnings will increase only 5% in 2020, and the market will experience at 5-10% correction in the first quarter.  Election years tend to be bumpy for the first half, as uncertainty rises, before it rises in the second half, as uncertainty falls.  Wall Street currently anticipates that President Trump will be re-elected and that the stock market will rise 5-8% in 2020.

The stock market has been “melting-up” in the fourth quarter, which is not sustainable, and I’m in no hurry to add fresh money in the next few months.