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What’s the Outlook for the US Stock Market in 2020?

2020-01-06

David Kostin, chief US equity strategist for Goldman Sachs Research, discusses his team's forecasts for US stocks in the year ahead. But before that, Tony Pasquariello, global head of hedge fund coverage for Goldman Sachs Securities Division, walks through the five numbers he's watching in markets.

This is an unofficial transcript meant for reference. Accuracy is not guaranteed.
This is exchanges Goldman Sachs when we discuss developments, curly, shaping markets, industries in the global economy, I'm jigsaw would go ahead of corporate communications heretofore. Today we will be talking to David casting about what's ahead for you as equities, and twenty twenty before that we're gonna get a quick markets. Update from tony Pascal realm of Goldman Sachs, carries division, Tony's watching five key numbers and markets right now over you, Tony Jake Thank you. Ve gotta, be with you today My name is turning thats grow and the global head of hedge fund coverage for the securities division of Goldman Sachs The big number I'm looking out right now is thirty percent. That was the the return of the ESA ninety five hundred and twenty nineteen, which was the best since twenty thirteen and a night, third percent outcome on a longer term, historical basis. Now again the expectations of most people coming out of a very rocky in
on eighteen lasher, one being a truly superb year for the stock market, as well as most every other major ass, a class when very wrong turns in emerging markets, the credit markets as well I commodities like oil in gold. So in the end, only nineteen played out as one of the highest quality years. In his The financial markets in Europe for once again on the very best horses in the race by the way in the last eight years, recipe was up twenty percent more. The market was higher in the subsequent year in all eight occurrences for meeting in return of seventeen percent a number and it's getting attention are right now, but doesn't nessus They tell us what we to know is p multiple on the assembly. Five hundred so that numbers started last year at fourteen point. Four ended last year at eighteen point, eight. for historical context. Eighteen point: it is in the nineties, presentable of the past forty three years, so
Oh, that number is rightly getting attention and I thank you, after respectful, respectfully history book and what currently, suggest about future returns and said I think it tells us everything we need to know, because when you look the bond market, very low level deal does available today on a global basis. I think it changes the implication. So another number that we follow is spread between the earnings yield of us, Five hundred and ten, you know eels also known as the equity risk premium, that current spread, around five hundred basis points compared to a historical There are three hundred semi basis points suggest stocks remain attractive when compared to box out and then move on to my third number again. sticking with the relationship between stocks and bonds. For a moment, a number that has not moved a lot but in doing so is actually caught. My eye is the one point five, six percent yield on the tea or no My observation here is a lot of things are going right for risk assets right now.
The economy is expected to become speeding twenty twenty, the binding, every event risk or on the UK election and the? U S a trade war has broken his amiable direction and again risk assets have a lot of positive momentum. Now, despite all that, the front and of the Eu S, interest rate curve, isn't moving that one. Fifty six to year note yielding mention: has barely budget has two months, which I think The function of the FED telling us that they're committed to keeping the funds rate anchored at a very low although in real terms, the funds actually negative right now and I think that's on net a bush. Many for risk ass. It's in your head number! Four! the number that I'm thinking about for the future is one point. Four, four five trillion That's the wedge between how much money his foot into Its name come funds and into money market funds. Virtues. How much has flowed out of agri funds in twenty nineteen?
oh, the surface last year saw five hundred and seventy two billion for into money markets. That was a record Another six higher forty four billion flow, inefficient income funds. That's also record against that two hundred and twenty nine billion for out of equities That was a near record eclipse only by the battle days of two thousand and eight again, despite finally, you a stock sit all time highs as we speak, and despite the fact that body are significant lower today than they were in late, twenty thousand eighteen last year saw a very clear trend of money moving out of stocks and into the bond market we're spending. A lot of time. Thinking about whether twin twenty summer version of that money flow to the benefit of equity funds. Finally, a number that I'm thinking about outside the office is seven, eighty, one or point seven, eighty one. That was the weeny percentage of my beloved New England Patriots during the day that just ended, which was the best of any major profession,
Wash franchise in the. U S after seven, eighty one, the next best on the way was a San Antonio spurs six, ninety eight, the Pittsburgh penguins at six. Forty six and the goal to stay warriors six. Forty, five thanks. Only now onto the next segment of the episode with David cost in the firms. Chief. U S equity strategists, whose here to talk to his teams, twenty twenty stock market forecasts, David, walk into the programme, beg you So let's get right to put some numbers on stock market projections for twenty twenty What is your estimate for the Essen p? Five hundred by year end twenty twenty three thousand four hundred but without represent their represent about a six percent returned from the current level of about three thousand two hundred. Ok, and how much will the? U S, economy, GDP growth in twenty twenty on average the? U S. Economy will grow at about two point: three percent for two thousand twenty and as premium in line with the average no growth, the last ten years are right so
the average some key profit margin next year about ten when eight percent, which is up just slightly from the current level. Ok and will ask equities enter a their market in the coming year. Do not expect that you will have a twenty percent decline. I expect the market will rise modestly, at the beginning of the year, to around three thousand two hundred fifty, bounce around a good part of the year until the election and expectation is arise towards three thousand four hundred and that's a target at the end of twenty twenty. Ok. now gives some contacts to those numbers. What what's driving your estimates? A key driver of estimates is the economy is growing at around two point: three percent, most companies overtime. I'm through their revenues in line with nominal gdp, so real GDP, expecting little over two percent inflation the less than two percent, so, broadly speaking, nominal gdp a four percent most companies will grow.
The revenues at four percent margin, to be, as I indicated, basically flat, is slightly higher than easier sales of download GDP equal sales, your sales, equal, premature, earnings yearnest around four percent- and it is about a hundred basis points. One percentage point increase from sharing sure purchases that gives you five percent, so the bottom line is you go around two percent: real GDP growth: that's what drives five percent GDP! growth earnest brochure, growth and that's, broadly speaking, Actually the market from this level going about just math, just math David you're teams, twenty twenty years equity outlook, is entitled United, we fall divided, we rise, explain, title and what it means to you ok. So the goal of forecasting at the end of two thousand twenty throwing away challenging because we have a big event: the? U S, elections that will take place in early number of twenty, twenty, so choosing or five
the aim of identifying a level of the stock market at the end of twenty twenty, Will require does require in certain assumptions about election outcome as just math as you. Just mentioned earlier. The current baseline assumption that we are using is that the divided government that we currently have, which is to say the House Representatives, the Senate and the President Wade is controlled by different parties. Different forms, that is the baseline assumption. We have a new earnings, will grow. Five percent evaluation the market, which is currently around eighteen point five times forward p multiple was day around whenever it is today, and that leads to a thousand four hundred target. That is my forecast and added divided government which currently exist cs in some form in two thousand and two, after the election, and that's the Ford recently emphasizes so much Is it really identifying a forecast for the end of twenty twenty invites
making assumptions on earnings for two thousand twenty one, the alternative assumption, Did you have a unified government- and one of the key assumptions involves the tax rate viewers corporations, the tax free, under the tax kite that took place at the end of two thousand. Seventeen reduced the tax rate, effective tax rate, the companies- for twenty seven percent to ninety percent. and if you assume for a moment that that reverses and that tax got is repealed, Then the earnest growth there were currently expecting looking into do the twenty one, a five percent, would end up being I have around seven percent. and that rising uncertainty about the policy, in two thousand twenty one would also. dollar, multiple, and so a scenario where you have a roll back of the tax got greater uncertainty would lead to the ESA be five hundred trading towards two thousand six hundred in my bed that would be under unified democratic government presented by that
would be the assumption that we are currently making because all of the leading candidates for the Democrats currently are proposing to roll back the tax cuts in part to pay for various private. so I us to be very clear that I am not making a valley, judge whether those are good or bad policies right, but rather the analytical. subject of where earnings will be de of earnings in two thousand twenty one baseline. forecasts as arise in line with the economy and of arithmetic and discuss this matter. and different scenarios. If you roll back their tax guy, there has never get it backs in earnest. Not a way of thinking about this is a certain amount of profits that currently enduring too? investor would no longer be in your into the equity. Invest will be in your into the government and ways of reallocating some that's binding right. So, Let's have a little bit about monetary policy. At this point, most people expect the the to stay pretty easy and steady next year illicitly
states. What does that mean for stocks in the year ahead so interest rate assumptions are important. Variable in terms of values of equities equity themselves in the United States are trading it pretty expensive levels. Relative history somewhere between the ninetieth and ninety percent out on every metric. Going back. two years, so there are high and that, while the one metric that these are actually quite attractive, is valuable, but you have to interest rates. We have whichever main loafer for quite some time, and so the baseline assumption that we are using in part of U S. Economic, team. Is that there were terrible will be on hold for really the next year and a half and sold sometime in letter part two thousand twenty one, so that stable policy rate also consistent with pretty low long term. Treasury which are going to rise in our forecasts slightly too two and a quarter percent at the end of two thousand and twenty. and that environment is still positive for equity prices and that's partly the ascent
we're making in our assumption its work aspect, because a relative rate of return is is high or pretty high and low interest rates. So you worked very closely with the on heartiest Anne and his macro economic steam. What's the outward, fiscal policy in an election year, as a lever to stimulate growth. We expect any action at all on fiscal policy in could that have an impact on markets? Was you indicated the? U S economic team is currently expecting. The government will run a trillion dollar deficit next year, so certainly spending alive. It's done as much flexibility in terms of new spending initiatives and with a divided governments, curling Washington's probably unlikely to, a significant new spending and other infrastructure or other types of that, and so the brought assumption were making is that the EU s consumer there's a critical assumption? U S consumer, which is about seventy percent of the US economy consumers in very strong position. There is both low unemployment rate I wish the unemployment rate and fifty years wages arising at around three and a half per cent
less than two should get real wage inflation balance sheet, The consumer has been delivered for ten years, so the balance sheet of the good. Restoring consumer confidence is very high and to all those assumptions, give view that the consumer is likely to continue to expand and grow, and that's a key driver of the economy and in corporate earnings enforced ceo confidence is extremely low. One of the lowest has been in ten years, and that is primarily driven by uncertainty. Around a train uncertainty around our political policies, etc, and so the expectation What we have is that the consumer is really the more important driver at this time and at some point they can see. Yo coffins will improve as the resolution of the uncertainty in politics takes place. That's suggests the economic expansion will continue for at least a couple years. So let let's talk a little bit more about that uncertainty next year I mean with you as China. Trade dynamics is so partial agreement phase, one so far- that fit into your base case, so
when he perceived the revenues of. U S, corporations are actually generate. The message we, and so that is really a key driver of overall earnings trade variable is certainly something that is action waned if reasonably mercurial a present Washington and a lot of uncertainty in terms that forecasting process so we're, assuming that you get so modest roll back of the tariffs very much. What you seen so far are not really expecting any more new terrorist. We love it and maybe there's some increased resolution of some variables, but why should we not anticipating abroad, resolution in terms of the overall comprehensive trade, and we can try that we have to follow that in the equity market. We can see what the stocks are implying. With respect to trade, we can look at the performance of us stocks to sell to China. Companies that livestock cell domestically and fear that, with chinese stocks is held to the edge states
Johnny Stocks automatically and look at their relationships and indicate that right. Now, though, equity market is pricing in something above seventy percent likelihood of a trade resolution and its basically r r r r forecast of resuming ok. So. When we talk about the election, but let's go back on one level: how to investors think about the the. election and its expected impact on markets particular because, as you said, you gonna have a period in the beginning of the year when you're, just looking at the primaries in the democratic Romany and then the latter half of the year was, can be waiting for an eventual. So the idea of the fundamentals are really critical, in terms of discussions with clients. Each but for a manager with whom I speak and interact has, different assumptions, both their own political biases, as well as their own forecast of, what's likely to take place based on Polly Data, etc. And so really the fundamentals come down to what is the likely path of profit,
and how are we going to value those profits? What's the probability of that other forecast, and so we see as some of them a progressive Canada The probability was increasing sharply earlier in the fall you saw the manage healthcare stocks as an example decline quite sharply as all the discussion wrapped up about Mary, you're fraud- things like that and I was stocks- were viewed at risk under those policies as the probabilities of progressive candidates. Declined. Those dogs have actually rallied quite quickly significantly, and so the idea that you pointed out of there, accident weighting of the political forces of different candidates has certain implications for some sectors than others, and so the discussions tend to evolve at extra level as opposed to the broad market level and the broad market level, is likely to stay as indicated something in the vicinity of thirty to fifty around those levels which would be consistent with the forecasts we haven't price its but individual sectors lots
SK? I should now around technology is pretty much by partisan view. Both Democrats, public. Is there should be some legislation involving privacy involving some of the technology companies, so that discussion that point We have, and I trust questions about different industries, and that is that they were more. The discussions take place at a more granular level, as opposed to broad market really hard to predict. What that will look like up there, any other key risks for the? U S on stocks and twenty twenty, that we have discussed beyond trade and in the politics, so the most surprising development and the equity market in the last six months to me was the reversal in by backs and so Corporate share purchases have been a vital driver of me. Any flow into the market. Toby look at the different components of Who owns the shock Bryce? Who was equities? You have households. Recently you have mutual funds alone indirectly, you have international investors, pension funds, for example, those categories comprise about. Eighty
five percent of the ownership of the stock market, and so we look flow is around was who is selling in these different categories. Overwhelming demand actually comes from corporate sherry purchases and for a while time. There has been a key source of the day. And and that jumped dramatically, our tax cuts that we talked about. The earlier of tax rates came down. For corporation unexpected boom in cash age. They took this extra profits and a bit junker that was used to buy back stock or someone who is also used to invest for growth and do other things, but that job by MAX expected after two thousand and would increase modestly in two thousand and nineteen in fact, it increased at the first quarter. surprise, me, a drop by eighteen percent in the second quarter and so that reversal of the amount of
marginal dollars directed towards five acts as a surprise, I think that's a risk or answer a question about two thousand and twenty we expecting around five percent decline are forecast for two thousand and twenty five percent decline you of a year in has spent on corporate reversing shares its about Lender seven hundred billion dollars will be spent so still a significant amount of money, but it down around five percent. Ok biggest potential upside event that could possibly impact stock market next year. So a resolution on trade would be a positive development, because as a source of some uncertainty, its and uncertainty in the form of higher input, costs for corporations therefore has a potential risk for lower margins for some companies, some industries, so, a resolution that I would, in fact be a positive say, an indicator earlier when I They are expecting much. pollution in that area, pretty much gonna where we are now, but that would be, I think, positive development for other markets. Don't look back
Nineteen David, give us the one minute description of what happened on the equity markets this year I think the most important dear, why we ve had almost thirty percent return in? U S stocks in two thousand and nineteen is the fact that this time were you fell by twenty percent, almost twenty percent in the fourth quarter of two thousand eighteen, so we actually had a particularly low already boy from timing perspective. That was that was important and now the percentage of the return to the stock market this here today, nineteen came from valuation expansion, as opposed to earn his growth. Well, there was not very much earnings growth for two thousand and nineteen, and so we look into next year. The story is more earnings, driven as opposed to valuation driven to the earnings, are the key driver for next year and enter What do you tribute that expansion evaluation this year? Well, idea of starting point data; critically low level? First and secondly, the pivot in the Federal Reserve and the Federal Reserve at this time last year was an interest
they needed to be hiking interest rates, four times in two thousand nineteen, and as a result of that pivot. In fact, the reserve ended up cutting interest rates by three three different times, and that was a I supported the expansion in valuation did glacier between interest rates and in and then stocks, and so that's the story of two doesn't it: yah, ok, so a profession, or personal, highlight from Turkey, nineteen and something you're. Looking forward to and twenty twenty so the personal highlight fervour differently: as a nineteen as I went to see, and do it. occasions to see all arguments at the. U S report extremely interesting very intimate setting and to watch the advocates, the council's on both sides and all the questions, there's a thirty may argument beside Azazel allotted and in depth. Thirty minute argument: there are sixty questions from the justices,
watching that back and forth was was extremely fastening to me very core I've. I've lived in washing more than ten years have never been so you beat me there David. They differ for joining us today. Ok, thank you very much. I conclude This episode of exchange the common sacks for listening and a few enjoyed the show. We hope you subscribe on Apple pie and leave a rating or a comment in for we're from Goldman Sachs experts, as was influential policymakers, academics and investors on market moving topics. Sure to check out our new podcast top a modicum of sex. Stood by also Nathan senior strategist in the firms, research division, thank you, all price references and market forecasts correspond to the date of this recording. This podcast should not be copied distributed, published or reproduced in whole or in part. The information contained
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Transcript generated on 2021-09-17.