2020 Forecast: Election To Cause Volatility?

Trade Balance Helps GDP Estimates

Let's first discuss the latest report on trade which boosted GDP estimates. Then, GDP Nowcasts and ECRI leading index which don’t include this latest data yet. Either way you look at it, GDP growth should be very close to 2%. That’s what I predicted back in November. If the PCE report beats what GDP tracking estimates expect, we could even see close to 2.5% growth. So much for there being a recession in 2019.

Trade balance in October was revised to show a slightly higher deficit, but the deficit shrunk solidly in November, boosting GDP estimates. Specifically, October’s deficit went from $66.5 billion to $66.8 billion. That’s a 0.5% decline in exports and a 2.2% decline in imports.  

Imports falling quicker than exports is good for GDP, but I’d rather see them both increasing. Weakness in the global economy could have spurred this trade weakness. Now, I don’t mind solid import growth because it means the economy has strong demand.

November report was better on a rate of change basis. Trade deficit fell to 63.2 billion which was below estimates for $69.5 billion and the lowest estimate on Wall Street which was $65 billion. Exports increased 0.7% and imports fell 1.3%. That’s closer to signaling the economy is doing well. That’s great for Q4 GDP growth. Merrill Lynch raised its estimate by 0.4% to 2% and Goldman Sachs raised its estimate by 0.2% to 2%. They agree with my call for near 2% growth. The economy is shifting from only relying on the consumer to business investment growth being one of the only weak spots. Business investment might even swing positively next year.

Latest Q4 GDP Nowcasts

CNBC calculation shows the median GDP growth estimate is 1.9% (12 estimates). Expect the Nowcasts to all move up about 0.2% when the trade data is included. With that in mind, let’s look at the latest Nowcasts. From last Friday, the NY Fed’s Q4 estimate fell 13 basis points to 1.19%. It’s one of the lowest estimates I’ve seen. It ended its 2 week streak of increasing. 

Durable goods report hurt the estimate by 10 basis points and revisions hurt it by 2 basis points. A slightly disappointing new home sales report had no impact. Q1 estimate also fell 13 basis points as it was 1.51%. Atlanta Fed Nowcast was raised to 2.3% from 2.1% last Monday. Estimate for real private gross domestic investment improved from -0.9% to -0.1%. Finally, the St. Louis Fed Nowcast was updated to show 2.14% growth. That’s a reasonable estimate opposed to the usually very optimistic estimates it has.

Leading ECRI index increased 0.7 to 147.7 in the week of December 20^th. That improved the leading index’s growth rate to 2.4% from 2.2%. That’s a decent sign for mid-2020. Bad news is the comps will start getting tougher in January. The next update will have the easiest comp of last year’s cyclical slowdown. We might even see negative yearly growth at some point in the winter because the stock market is ripe for a correction.

2020 Predictions: Politics To Cause Volatility

My first 2020 prediction is there will be volatility caused by a scare about a move to the far left. Of course, I don’t know who will be elected president, but I do know 2 things: 1) the stock market has ignored Sanders’ rise in the betting market 2) Biden is leading Trump in the polls.

The stock market is whistling past the graveyard when it comes to Sanders’ chance of winning. His presidency would mean higher taxes for corporations, yet stocks are up big in December. From November 30^th to December 30^th, Sanders’ chance of being the Democratic nominee increased from 17% to 26%. That has meant nothing to stocks. But it should matter because I think he will win Iowa and New Hampshir. He’s down by 2 points to Buttigieg in Iowa and up by 1.3% in New Hampshire.

In Q4, Bernie raised the most money and has the most donors. He has raised money from 4.86 million donors. If they gave him an average of $18, he raised $26 million. Biden has raised close to the $21.5 million he raised in Q2, which is up from Q3. Warren raised less money and is hoping to hit $20 million. Buttigieg had 700,000 donors, which is his most by far, but he is way behind Bernie. Sanders has the strongest base of support.

In the 2016 election, Donald Trump lost the popular vote, but won because of the electoral college. An average of polls had him losing by 3.2 points and he lost by 2.1 points. Currently, Biden is winning by 4.5 points. Personally, I think the economy will improve in 2020. But the question is if that’s enough to help boost President Trump’s polling. Especially since consumer sentiment is already very high. Economic data shows Trump will win and the polls show Biden will win. I don’t know who will win, but I think there is much more uncertainty than is being priced into stocks.

A key to investing is figuring out what the market is pricing in and then making a bet based on what you see the odds being.  For example, if you thought there was a 25% chance of a recession in January and you saw the market was pricing in an over 50% chance, you should have bought stocks. The market is completely ignoring the election. But I see a 25% chance of Sanders winning the nomination and a 60% chance of Biden winning the general election if he gets the nomination. That’s a negative catalyst. 

Heading into the 2016 election, I gave much higher odds of Trump winning (50%) than the media did. That relative prediction was correct, but the short position backfired because stocks rallied after Trump won. Stocks rallied partially because of potential tax cuts and partially because the economy was entering a cyclical upturn. I see a cyclical upturn occurring earlier in 2020.