2020 First Quarter Commentary

THE FEDERAL RESERVE BOARD (Lender of last resort in the event of banking panics)

Today’s Fed also seems to want to be a lender of early resort to nip recession in the bud.  However, promoting a public perception that the Fed will always be able to prevent serious recessions and drop in asset prices is a reliable precursor to over-speculation and “credit crunches.

(Economist Albert M. Wojnilower, Ph.D.)


The Fed has lowered the Fed Funds (short-term) rate three times in 2019.  Fed Chairman Powell told Congress last month that he expects the economy to continue to grow at a solid rate, though risks persist from slower overseas growth and from the trade war with China.  In sum, the Fed is expected to stay the course and leave short-term rates where they are so long as the US economy is stable and GDP growth remains in the 2% plus range.


THE ECONOMY HAS ESTABLISHED A RECORD NINE YEAR EXPANSION WITHOUT A RECESSION and GDP continues to grow at about 2% through 2019.  Recent data:

  • 2.1%      GDP estimate for the second quarter of 2019
  • 0.3%      October retail sales
  • 43%       Black Friday (est.) online sales increase totaling a record $7.4 billion
  • 3.6%      Unemployment rate in October
  • 3.0%      Average hourly wage increase year over year
  • 3.8%      October housing starts
  • 5.0%      Permits for new construction
  • 96.8       University of Michigan Consumer Confidence Index.  Up from 95.5 in October

Household spending is keeping the economy growing, thereby creating more jobs that maintain the long-term expansion intact.  This virtuous cycle is likely to continue until the U.S. runs out of excess labor.  Anticipated worker shortage is currently delayed by new entrants into the U.S. labor force.


While China’s rapid growth has been slowing, the long-term growth will be further limited by demographic trends. See Chart A and Chart B:

Chart A
Chart B

In addition to huge over building of infrastructure, debt as a percent of GDP at 276% and declining exports, many Western supply chains are being diverted to other lower cost Asian nations.  China has moved from America’s largest trading partner to third place behind Mexico and Canada.  See Chart C

Chart C


There are relative valuation reasons for the steady rise in stock prices as well as estimated earnings growth in 2020.  The earnings yield on the S&P 500 Stock Index is 5.4% compared to the yield on the 10-year US Treasury of 1.9% at year end.  Even the forward dividend yield on the S&P Index (2.2%) equals the 10-year Treasury yield.  See Chart D:

Chart D

The tax reform lowered the effective rate to 19% for corporations.  See Chart E:

Chart E

While corporate earnings on the S&P 500 Stock Index have been flat at near record levels in 2019, a 10% gain is projected for 2020.

The Conference Board Consumer Confidence Index was 125.5 in November, down slightly for the last four months.  However, the Expectations Index, representing consumers’ outlook for income, business and labor conditions increased from 94.5 in October to 97.9 in November.


The new trade agreements with Japan, South Korea, Canada, Mexico and phase 1 of an agreement with China will support growth and could add ½ of 1% to US GDP.

The U.S. dollar should remain a safe haven for foreign investors with Treasury note yields well above yields on other sovereign debt.

Foreign central banks will keep interest rates low due to economic weakness and political turmoil.

Despite a strong economy, the Fed is expected to hold interest rates low to keep US exports competitive and because inflation remains below the 2% year over year target.

Consumer spending, augmented by rising wages, will remain the driving force for economic growth.

We will stay the course as we approach 2020 with emphasis on quality earnings predictability, and steady, dependable dividend income.  Equity valuations remain reasonable relative to alternative investments and positive earnings trends in the year ahead should support somewhat higher stock prices.