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John Engle
John Engle
Articles (434) 

Goldman Predicts Strong Market and Growing Economy in 2020

The investment bank has served a big helping of seasonal cheer

November 29, 2019 | About:

2019 has proven to be quite the economic and financial rollercoaster. With signs of economic slowdown proliferating and no end to an escalating U.S.-China trade war in sight for much of the year, many investment banks and market analysts feared that a market downturn and recession might be imminent.

Over the past couple months, however, things have brightened considerably. In November, buoyed by signs of progress on trade, as well as strengthening economic data, stocks hit new all-time highs. Much of the widespread pessimism of earlier this year seems to have been dispelled. This has resulted, unsurprisingly, in higher hopes for a strong 2020.

Goldman Sachs (NYSE:GS) was the latest Wall Street firm to offer its predictions for the year ahead. In a research note published on Nov. 29, the investment bank painted a rosy outlook for 2020, thanks to improvements in trade, monetary policy and the broader economy.

Trade talks and loose monetary policy improve financial outlook

According to Goldman, the Federal Reserve’s reversal on interest rates has set the market up for further growth in 2020. At the end of 2018, many analysts feared that the Fed’s efforts to tighten monetary policy could tip the economy into contraction. Goldman has now surmised that the Fed is unlikely to change course again, barring serious inflationary pressure:

"[The Fed] would need to see a really significant move up in inflation that's persistent before we even consider raising rates to address inflation concerns."

The Fed’s dovish turn is likely to bolster stocks for some time, but Goldman expects a bigger boost from a resolution of the ongoing trade war. Goldman expects “the drag from the trade war to fade” in 2020, as the Trump administration’s trade team works gradually toward an accord with its Chinese counterpart. A major breakthrough would certainly inject a heavy dose of confidence into the market.

Taken together, Goldman sees a dovish Fed and detente with China as a sure recipe for better financial conditions:

"Driven by both the better trade news and easier monetary policy, the sharp tightening in financial conditions in late 2018 has now fully reversed."

Consumer and business confidence boost real economic outlook

Financial markets can only be as strong as the economic activity they mirror. Thus, efforts to improve financial markets can do little if the economy is sputtering. There were signs earlier in 2019 that a slowdown was in full-swing.

However, Goldman’s latest outlook shows considerable confidence across the board. Consumer spending, a key metric of economic health, has shown some strength of late:

"Healthy consumer confidence and solid gains in disposable income growth and household wealth should keep consumption growing at a roughly 2.5% pace next year. Meanwhile, some of the recent weakness in business investment - especially in the energy and aircraft categories - is likely to prove temporary."

Drags on the supply side may also be dissipating. Inventory adjustments had been dragging on output, but Goldman now sees these pressures fading in 2020:

"The drag on goods-sector output from the inventory adjustment is probably nearing an end...Inventory investment as a share of real GDP hit its highest level since mid-2015, the monthly numbers have slowed steadily and the inventory components of both the ISM and the Markit PMI have fallen below 50."

Outlook 2020

The economic expansion following the Great Recession has appeared on the cusp of stumbling a number of times, but it has managed to persist. But, as the longest expansion in modern economic history, some wonder how long it can last. According to Goldman, rumors of the bull market’s death are much exaggerated:

"The current expansion is now the longest in US business cycle records dating to the 1850s, and some recession fears may simply reflect an instinctive sense that its time is nearly up. This has not been an unreasonable thought historically, as the two usual late-cycle risks-inflationary overheating and financial imbalances-often did grow over time. But so far both risks look limited.”

If consumer spending and industry output continues to show robust health into 2020, combined with improvements and trade, there may be good reason to share Goldman’s broadening confidence for the year ahead.

Disclosure: No positions.

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About the author:

John Engle
John Engle is president of Almington Capital - Merchant Bankers. John specializes in value and special situation strategies. He holds a bachelor's degree in economics from Trinity College Dublin and an MBA from the University of Oxford.

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