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Why Stocks Are Poised To Soar In 2020

Kevin Matras

What a year so far.

With only a couple weeks left, this year’s stock market performance looks like it will go down in history as one of the best in decades with the Dow up 21.9%, the S&P up 27.5%, and the Nasdaq up 33.3%. And there’s still two weeks left to go.

And I firmly believe we’ll see similar results again next year, and likely even better.

But first, let me put this year’s returns into perspective.

Fantastic returns, no matter how you slice it. But a good portion of that was simply recovering from December 2018’s plunge on trade fears, interest rate uncertainty, not to mention a partial government shutdown. And that sent the S&P 500 down by nearly -15% in just one month, making it one of the most painful Decembers on record.

The so-called ‘trade war’ with China was heating up.

The Fed had disastrously raised interest rates four times that year.

The government was headed for, and ultimately began, a partial government shutdown.

And the know-nothing doomsayers came out of the woodwork predicting recession, and the beginning of a bear market.

But not us.

Quite the opposite.

I continued to tell people to buy the dips as this was a gross overreaction based on a misinterpretation of what was actually happening in the economy, and that stocks would soon soar.

Prediction Becomes Reality

I publicly told people that the S&P would find major support at 2,352 (2,352.72 to be exact).

And on 12/24/18 (Christmas Eve), we hit that. (Actually, it closed just under there at 2,351.10, which was just 6/100ths of 1 percent under my support target. Hard to get much closer than that.)

But I was so confident that support area would hold, I personally bought the triple leveraged S&P ETF (ticker SPXL) in the last few minutes of that trading session, at the virtual low of the day.

And when we returned on 12/26/18 (the day after Christmas), and after quickly dipping below support one more time for a few minutes, stocks surged higher in a massive turnaround, closing up by 4.96% that day (which, by the way, had the triple leveraged S&P ETF that I had bought, gaining 14.49% that day)!

And so certain was I that this was the bottom, and that a huge rally would ensue, I added to my position again on the 27th, then again on the 28th, and I also added the triple leveraged Small-Cap ETF as well (ticker TNA).

And the bottom it was.

As we now know, the first quarter’s performance of 2019 was literally one of the best in many, many years. And we all know that stocks continued to rally throughout the year, making new high after new high, to where we are today.

So, why was I so convinced that the irresponsible talking heads were so wrong? Because all one had to do was look at the numbers.

More . . .


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The Great Non-Trade War and Non-Recession

I hated when people called the U.S.-China trade negotiations a trade war. It made it sound much worse than it was.

It wasn’t a trade war. It was a disagreement. And both sides were negotiating a resolution.

Nonetheless, the market went into a tizzy over the tariffs.

But as I had been saying over and over, people were not understanding the true impact of what those tariffs meant.

It was estimated that the first round of tariffs on $200 billion of Chinese goods and $60 billion of U.S. goods would likely only shave off two tenths to three tenths of one percent off of our GDP. (Although, it would likely knock a half percent off of China’s.)

That number would climb to four tenths to a half percent off of our GDP if the U.S. levied tariffs on the additional $300 billion it threatened. And that would likely shave more than one full percentage point off of China’s GDP. (Clearly, they were going to get the short end of the stick.)

But again, even with the worst case scenario taking place (which it didn’t, as those additional tariffs were never implemented), our full year GDP would still have been higher than the average annual GDP since this bull market began.

That’s not what a recession is made of. That’s strong economic growth. So the recession doomsayers were not only wrong, but they were reckless and irresponsible because the facts never added up to their nonsensical predictions.

The Fed’s Mea-Culpa

The market also went into full-blown hysteria over interest rates and the subsequent inverted yield curve.

For one, the Fed ill-advisedly raised interest rates four times in 2018. There were no signs of inflation, yet they did it anyway. I get that they wanted to ‘normalize’ monetary policy, but they over-aggressively raised rates when they shouldn’t have.

And because of that, we finally saw the yield curve invert.

Many immediately jumped onto the bandwagon proclaiming that once the yield curve inverts, it somehow magically means the U.S. economy will fall into a recession within the next 18-24 months, and cause a bear market.

More misinterpretation.

First off, any indicator that has a two-year lag is not an indicator at all. (As if everyone is helpless to do anything about it.)

And I railed against this notion.

Even former Fed Chair Janet Yellen dismissed the yield curve inversion hysteria by explaining that there were a number of factors other than market expectations causing the yield curve to invert. And that there was no threat of a recession.

Same with Fed Chair Jerome Powell. When he was asked about the yield curve inversion, he downplayed the importance of it, and the suggestion of a recession. And he noted that in the past, “inflation was allowed to get out of control, and the Fed had to tighten, and that put the economy into a recession.” And he followed up by saying. “that’s not really the situation we’re in now.”

Finally some sensibility.

But the ‘sky-is-falling Chicken Littles’ still kept pointing to the inverted yield curve as some inevitable harbinger of recession.

But as Mr. Powell alluded to, an inverted yield curve isn’t necessarily an indicator of a recession, it’s a warning that interest rates are too high, and THAT could choke off growth if not fixed.

So what’s the remedy? Lower interest rates.

And the Fed reversed course and ended up lowering interest rates three times in 2019. Almost entirely undoing their misguided tightening policy from the year before which wreaked havoc on the market.

And it was about time.

The biggest reason why the yield curve inverted in the first place was because there was an enormous demand for our Treasuries. And it’s easy to see why. With slower growth rates around the globe, and the pervasiveness of near zero yields and negative yields in bonds of other countries, where else were bond investors going to put their money?

In the U.S., of course.

So there was no reason why U.S. rates needed to be so high.

And when the Fed cut rates, that finally pushed short-term yields down where they belong, the 10-year rose, and the inversion was corrected.

That also stimulated the economy and made stocks even more attractive.

And by the way, the 35-day partial government shutdown that began on December 22nd, 2018 and ended on January 25th, 2019, was just that, a small partial government shutdown that would have very little impact on the economy.

People knew that, but hysteria still took over.

(Sigh.)

Historic Gains 

Congrats to you if you were able to tune out the doom and gloomers and naysayers.

Because here we are now at record highs.

The economy is strong, and likely to get even stronger in 2020, on the heels of two record trade deals with our top three trading partners. These deals alone are expected to usher in a new wave of prosperity as pent-up demand is unleashed, and new demand is created.

Unemployment is at a 50-year low, and likely to go even lower.

Consumer sentiment is near record highs. (An important barometer given that 70% of our GDP is made up of consumer spending.)

And that’s likely to continue with wages on the rise and household income at the highest level in 20 years.

So what am I expecting for 2020?

Another 25-30% increase for stocks.

As I’ve been saying, these are historic times for the economy and the market.

And historic times create historic opportunities.

Some have even called this the greatest economy of our lifetime.

Don’t look back at this period in time and think about what you wished you would have done.

Do it now.

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Thanks and good trading,

Kevin

Zacks Executive VP Kevin Matras is responsible for all our trading and investing services. He developed many of our most powerful market-beating strategies and directs the Zacks Method for Trading: Home Study Course.


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