It’s that time again.
As he has done every January for the last 34 years, Blackstone Vice Chairman and former Morgan Stanley Chief Economist Byron Wien on Thursday released his annual “10 Surprises” list for the year ahead (the release was accompanied by a brief appearance on CNBC to review his predictions for 2018, while offering some insight into his thought process for 2019).
After putting in an abysmal performance with his projections for 2017, Wien had a somewhat better showing in 2018, accurately predicting that US growth would improve, the Fed would hike rates four times, the dollar would finally “come to life” and North Korea would agree to suspend its nuclear weapons program. He also projected that the S&P 500 would endure a 10% correction before rebounding to 3,000, and that oil prices would top $80 a barrel – and although “almost” only counts in horseshoes and hand grenades, we think it’s fair to acknowledge that Wien was at least half right.
Falling mostly in the realm of geopolitics, Wien’s less successful calls included projections that Jeremy Corbyn and his Labour Party would rise to power in the UK, and that Republicans would lose control of both Houses of Congress (though again here he was half right). Though he also fudged calls for Treasury yields to move toward 4% and for inflation and wage growth to accelerate beyond 3% while global growth also improved.
Unsurprisingly for the perennially bullish Wien, most of his projections for 2019 center around a rebound in US stocks, which he projected would rally 15% by year’s end, and that the US economy will avoid a recession as the Federal Reserve pauses its program of interest rate hikes (a projection that’s gaining popularity among the CNBC set and traders, who are pricing in a higher likelihood that the Fed will cut rates).
Growth stocks – including tech and biotech – help lead the market rally higher, while value disappoints (so essentially a replay of the first nine months of 2018).
The dollar will stabilize around end-2018 levels, while gold drops to $1,000/oz and the profit outlook for emerging markets brightens.
Wien is also calling for a second Brexit referendum, more indictments against members of the Trump Organization and the president’s inner circle (however, the scrutiny will trigger an exodus of Trump’s closest advisors, which is, in one sense, already happening).
For those who are unfamiliar with Wien’s methodology, his surprises list comprises events that investors assign 1-in-3 odds of happening, but that Wien thinks are more than 50% likely.
Below is the full list of Wien’s projections for 2019:
- The weakening world economy encourages the Federal Reserve to stop raising the federal funds rate during the year. Inflation remains subdued and the 10-year Treasury yield stays below 3.5%. The yield curve remains positive.
- Partly because of no further rate increases by the Federal Reserve and more attractive valuations as a result of the market decline at the end of 2018, the S&P 500 gains 15% for the year. Rallies and corrections occur but improved earnings enable equities to move higher in a reasonably benign interest rate environment.
- Traditional drivers of GDP growth, capital spending and housing, make only modest gains in 2019. The expansion continues, however, because of consumer and government spending. A recession before 2021 seems unlikely.
- The better tone in the financial markets discourages precious metal investors. Gold drops to $1,000 as the equity markets in the United States and elsewhere improve.
- The profit outlook for emerging markets brightens and investor interest intensifies because the price earnings ratio is attractive compared to developed markets and historical levels. Continuous expansion of the middle class in the emerging markets provides the consumer buying thrust for earnings growth. China leads and the Shanghai composite rises 25%. The Brazil equity market also comes to life under the country’s new conservative leadership.
- March 29 comes and goes and there is no Brexit deal. Parliament fails to approve one and Theresa May, arguing that a change in leadership won’t help the situation, remains in office. A second referendum is held and the U.K. votes to remain.
- The dollar stabilizes at year-end 2018 levels and stays there throughout the year. Because of concern about the economy, the Federal Reserve stops shrinking its balance sheet, which is interpreted negatively by currency traders. The flow of foreign capital into United States assets slows because of a softer monetary policy and a lack of need for new capital for business expansion.
- The Mueller investigation results in indictments against members of the Trump Organization closest to the president but the evidence doesn’t support any direct action against Trump himself. Nevertheless, an exodus of Trump’s most trusted advisors results in a crisis in confidence that the administration has the people and the process to accomplish important goals.
- Congress, however, with a Democratic majority, gets more done than expected, particularly on trade policy. Progress is made in preserving important parts of the Affordable Care Act and immigration policy.A federal infrastructure program to be implemented in 2020 is announced.
- Growth stocks continue to provide leadership in the U.S. equity market. Technology and biotech do well as a result of continued strong earnings. Value stocks other than energy-related businesses disappoint because of the slowing economy.
Every year, Wien includes a few also-rans – surprises that didn’t make Wien’s top ten because he doesn’t believe they’re as relevant, or because they’re not, in Wien’s estimation, as probable.
- Geopolitical tensions increase. Iran continues to destabilize the Middle East and Kim Jong Un fails to live up to his North Korea denuclearization promises. Secretary of State Pompeo and National Security Advisor Bolton make statements indicating the United States may take pre-emptive action in both places, thereby causing one of several sharp market sell-offs. But in spite of hostile rhetoric, the United States does not go to war with anyone as we approach the 2020 election. Trump’s tough talk on some issues like trade works, however, and leads to successful diplomatic negotiations on national security.
- In desperation China engages in ambitious infrastructure programs to bolster its economy. China grows at 6.5% real, but the increased debt causes concern around the world and has a negative impact on the renminbi.
- China announces, “We want to be the world leaders in free trade.”It sends envoys around the globe to negotiate better bilateral trade terms in order to offset the losses from the ongoing U.S. disagreements. Joint ventures in which foreign companies control the majority share are initiated in all sectors, from industrials and autos to raw materials. As China’s influence around the world becomes greater, the U.S. further isolates itself.
- The European Central Bank is forced to restart quantitative easing in response to a defiant Italy, a weakening Germany and Brexit.Thwarting expectations that Brexit would bring the rest of Europe closer together, Italy realizes that it can break all fiscal rules without any fear of punishment from the E.U. As a result, the Italian economy falls into recession, debt spreads surge and the ECB is forced to liquefy the system again.
We’ll check back in one year to see how bad well he did.
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