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Stocks, Economy and More: Expect the Best but Prepare for the Worst in 2020, Analysts Warn

Last Updated September 23, 2020 1:26 PM
Laura Hoy
Last Updated September 23, 2020 1:26 PM
  • Analysts expect 2020 to be a relatively smooth year for the stock market despite many risks to their predictions.
  • The presidential election, the trade war and wage growth are among the largest risks to the market.
  • The strength of the U.S. housing market remains a subject of debate, but home prices look likely to level off in 2020.

The economic outlook for 2020 is unique, as it depends on several “what-if” scenarios. That’s made it difficult for analysts to take a firm position on where they see the U.S. housing market, the Dow Jones, and the economy heading. The result has been an echoing refrain among analysts:

Everything should work out, but there’s also a chance it wont. 

Morgan Stanley Uneasy About Trade War Risks

Analysts at Morgan Stanley see “calmer waters ahead” as trade tension dies down and the Fed maintains its accommodative policies. Chief Economist Chetan Ahya is optimistic about the global economy , saying that although the current economic expansion has persisted for over a decade, “interruptions” like the trade war with China and Europe’s debt crisis have extended the economic cycle. 2020 will probably continue that trend with another “mini-cycle recovery.”

Ahya and his team see average GDP growth in 2020 coming in at 3.2%. The majority of that growth isn’t expected to come from the U.S., but from emerging markets and potentially Europe. 

U.S. GDP growth is seen steady, but unimpressive. | Source: Morgan Stanley 

In the United States, MS Chief U.S. Economic Ellen Zentner says the economy is “distinctly in the late-cycle phase of recovery.” GDP growth is seen at 1.8% in 2020, down from the 2.3% expected in 2019. 

Morgan Stanley is still advising investors to be defensive, though. Ahya cautioned that trade tension remains a huge risk to the global economy. If more tariffs are put in place, the result could be disastrous as central banks around the world have already used the majority of their tools leaving very little to fall back on.

Goldman Sachs Cautions on Profits in 2020

Analysts at Goldman Sachs have a similar, cautiously optimistic view  on 2020 saying,

The risk of a global recession remains more limited than suggested by the flat yield curve, which partly reflects a structural decline in the term premium, and the low unemployment rate, whose predictive value for inflation and aggressive monetary tightening has fallen. We also take comfort from the absence of significant private sector financial deficits in all but a few advanced economies.

Goldman noted that a Bloomberg survey of economists revealed they see a 33% chance of a recession over the next 12 months, but said its own view of that risk is far lower. The firm says the chance of recession in the U.S. next year is just 20%. A big part of Goldman’s positive outlook comes from the financial strength the firm sees in American households and businesses. 

Goldman says the probability of a recession in 2020 is low. | Source: Goldman Sachs 

Like Morgan Stanley, Goldman noted that 2020 is full of uncertainties that call for cautious investing. The presidential election has the potential to disrupt markets, especially if there’s a shift in power. No matter who takes office though, Goldman cautioned that corporate profits will be under pressure from wage growth. That could lead to increased volatility in the U.S. stock market. 

Bank of America Says No U.S. Recession on the Horizon

Bank of America’s Michelle Meyer agreed that the chances of a recession are low despite worries about the yield curve. She says the fact that the yield curve was only briefly inverted is encouraging— though it does suggest we are in the late stages of economic expansion.

Meyer was also optimistic about the prospects for workers, saying job security and potential wage growth both look encouraging. 

She pointed to the Fed’s interest rate cuts as the reason that both mortgages and auto loans have become less expensive. She is expecting mortgage rates to remain close to current levels throughout 2020, though that may not benefit the U.S. housing market. This year has brought on a huge debate about the health of the housing market as the younger generation holds off on buying homes. Demand for homes has also been uneven, prompting some to question whether the market is on steady ground.

U.S. Housing Market Uncertainties

Dan North, the Chief Economist at Euler Hermes North America, says the U.S. housing market is on stable ground . He says that homes are “probably overvalued but not to a great degree,” and that the market is nowhere near where it was in 2005 before the bubble burst. 

House prices are unlikely to continue rising at the same rate. | Source: Zillow 

House prices aren’t likely to continue rising at the same clip, though. Zillow research shows that home value appreciation is likely to further slow in the coming year, with annual growth of just 2.8%  expected in 2020. In December 2019, U.S. home values grew just 2.8% — the smallest annual rate since 2013.