Blackstone Vice Chairman Byron Wien predicts in 2020 there will be no comprehensive trade deal and the Fed will be forced to cut interest rates twice because of an underperforming economy, but that the S&P 500 will still rebound to an all-time high despite increasingly volatile trading.
These predictions are part of his often prescient “Ten Surprises” list, which has been a must-read on Wall Street since Wien, a 50-year veteran of Wall Street, began publishing it in the mid-1980s when he was chief investment strategist at Morgan Stanley.
Over the course of 2020, he also envisions tech stocks — 2019’s top sector — underperforming the broader market, and airline stocks rallying as Boeing’s embattled 737 Max jet returns to the sky. On the geopolitical side, he thinks the United Kingdom will leave the European Union once and for all, and that tensions in the Middle East will rise.
The list, which Wien now publishes together with Joe Zidle, chief investment strategist in Blackstone’s private wealth solutions group, compiles events that they view as “probable” — meaning a greater than 50% chance of occurring — that an average investor might view as having only a one in three chance of playing out.
Stocks rally after Fed cuts
Looking ahead, Wien said that in 2020 a recession will be avoided, but that economic growth will fall short of estimates. This will prompt the Federal Reserve to slash interest rates twice by a quarter point (or one big cut) to 1%, down from the current range of 1.5% to 1.75%.
“The economy disappoints the consensus forecast, but a recession is avoided,” the list states. “Federal Reserve Chair Powell lowers the Fed funds rate to 1%.”
This would be a surprise to the market. The Fed said in December it expects to keep rates unchanged this year as the economy grows steadily and inflation picks up only slightly to its target range.
On top of slowing economic growth, a Phase Two trade deal won’t be reached, they predict. In an effort to boost the economy, President Trump will use “every executive authority he has to stimulate growth,” which includes cutting payroll taxes.
Wien said that the yield on the 10-year treasury will approach 2.5%, and that the yield curve will steepen. This is a widely followed metric on the Street, since recessions are typically preceded by a steepening of the yield curve.
Wien predicts that the S&P 500 will top 3,500 for the first time — around 8% higher than where the index currently trades — but volatility will increase and there will be “several market corrections greater than 5% throughout the year.”
According to CNBC’s “Market Strategist Survey,” the average 2020 year-end S&P target is 3,330. The highest is 3,500 from John Stoltzfus at Oppenheimer, and the lowest is 3,000 from Morgan Stanley’s Michael Wilson.
But while Wien sees stocks rising, the boost won’t be from strength in fundamentals. “Earnings only increase 5%,” he said, and “S&P 500 multiples remain elevated because monetary policy is easy and investors becomes more comfortable that intermediate interest rates will rise slowly.”
Tech will underperform
Technology led all sectors in 2019 after returning 48% — its best year in a decade — but Wien envisions 2020 shaping up differently.
While governments have tried to break up big tech in the past, Wien said that there could be “greater success” this time around given “widespread support from the American people.”
Wien also believes that there will be a “balkanization of technology” prompted by the lack of a Phase Two trade deal as China’s ability to acquire intellectual property isn’t capped. This will lead to an erosion of the economic co-dependence between the U.S. and China.
“The development of separate standards for 5G and other tech hardware proves to be bad news for the future of world economies,” he said.
Oil heads higher
Wien believes that U.S. West Texas Intermediate crude will trade as high as $70 per barrel in 2020 as geopolitical tensions in the Middle East rise. WTI currently trades around $63 per barrel, and it has not topped $70 since 2018.
Oil prices gained more than 3% on Friday in the aftermath of the airstrike that killed Iran’s top commander Qasem Soleimani, with analysts saying that Iran’s chosen method of retaliation would determine the next move for oil.
But by Monday traders appeared to be less concerned, and oil gave back a more than 2% gain to settle little changed, even spending some time in negative territory.
That said, Wien anticipates that there will be retaliation, and that it will be in the form of a targeted oil attack. He said Iran will step up “acts of hositlity against Israel and Saudi Arabia,” and that the straits of Hormuz will be closed.
This would be felt worldwide since more than one fifth of the world’s oil supply passes through the waterway.
A big Brexit winner
After years of negotiations, Wien believes that 2020 will be the year the United Kingdom officially leaves the European Union.
He argues that with newfound clarity, the U.K. will be the winner from its departure, with U.K. markets and the pound moving higher.
The countries remaining in the European Union, however, will not fare as well. “The EU economy remains soft,” he said, while anticipating that the bloc will underperform relative to the United States and Asia.
Boeing backlash subsides, lifting airline stocks
2020 will be the year that Boeing’s embattled 737 max aircraft returns to the skies, according to Wien, which means upside ahead for airline stocks.
He said that the company will fix the issues surrounding the aircraft, and that deliveries will begin again. This, in turn, will allow airlines to “operate more efficiently and increase profits.”
“The stocks become market leaders,” he said of airline names.
Re-visiting last year’s list
Looking back at 2019’s “Ten Surprises,” a number of Wien’s predictions came true. He thought the Shanghai Composite would rise 25%, for example, and it finished the year with a 22.3% gain. He said the Federal Reserve would stop raising rates, which it did. (He did not, however, predict that they would cut rates three times.) He also predicted that technology and biotech stocks would rally.
For the broader market, he predicated a rise of 15%, which was almost half of the S&P 500’s 28% return for 2019.
Some of his political predictions also missed the mark. He thought a Brexit deal wouldn’t be reached by March 29, which was correct, although he thought Theresa May would remain in power and that a second referendum vote would be held, with the country ultimately voting to remain in the European Union.
Finally, he argued that bullish sentiment would lead to investors turning away from safe haven assets like gold, and that the precious metal would drop to $1,000. Instead, gold closed out the year trading at $1,523.