The stock market may not be the economy, but the stock market is the place where investors make bets about the economy.
Right now, investors are betting that the “Trump economy” is going to vindicate the president – and prove the experts wrong.
During the early days of his presidency, Donald Trump boasted that US GDP would grow as fast as 6% annually under his administration.
The White House quickly moderated that forecast to a much less-ambitious 3% GDP target, albeit one the US economy failed to hit in each of Trump’s first three years in office.
But according to $5.7 trillion asset manager Vanguard, stock market valuations reveal that investors believe the fourth time will be the charm.
Vanguard Chief Economist Joseph Davis told Bloomberg that the equity market is priced for 3% GDP growth in 2020, even though most experts believe the US economy will struggle to clear the 2% threshold.
A recent survey of professional forecasters found that the consensus outlook for Real GDP growth is 1.8%. Davis believes that target is still too optimistic.
Citing lackluster Treasury yields, he says the bond market is pricing in 2% growth as a best-case scenario. He predicts the US economy will slow to a near-crawl in 2020, dropping GDP growth to just 1% from an estimated 2.3% last year.
That could set the stock market up for a rude awakening.
Stock prices rose far more sharply than corporate earnings in 2019, driving valuation multiples toward record highs.
Historically, the stock market hasn’t remained this divorced from profits for long. Either profits must rise – or prices will fall.
“The confidence that investors have in the re-acceleration of the economy and profits hasn’t been shaken, and you need that to justify prices where they are and to continue to see positive performance in 2020,” Thomas Hainlin, global investment strategist at Ascent Private Capital Management at US Bank, told The Wall Street Journal.
Unfortunately for investors, even the White House may be giving up on its 3% GDP goal, though not because the president suddenly thinks the target is unreasonable.
Treasury Secretary Steven Mnuchin said on Sunday that Boeing’s ongoing struggles could erase as much as 50 basis points from overall US GDP. He lowered his 2020 forecast accordingly – to 2.5%.
Judging by today’s stock market rally, Wall Street bulls don’t appear to be having similar reservations. Both the S&P 500 and Nasdaq closed the session at new all-time highs.
Disclaimer: The opinions in this article do not represent investment or trading advice from CCN.com
Last modified: January 22, 2020 11:39 PM UTC