Final Review of 2020 “Sure Things”
Every January, I start keeping track of the predictions for the upcoming year I hear in the financial media and from advisors and investors. With the arrival of 2021, it’s time for my final review of how the 2020 forecasts played out.
As is my practice, I will give a score of +1 for a forecast that came true, a score of -1 for one that was wrong, and a 0 for one that was basically a tie.
Here is the final review of the nine sure things I was tracking:
- U.S. economic growth will be durable enough to avoid a recession, but disappointing to those expecting improvement. GDP growth will slow from about 2.3% in 2019 to 1.8% in 2020, according to the Philadelphia Federal Reserve’s 2019 survey of professional forecasters. The coronavirus upended all economic forecasts. Its fourth quarter 2020 survey predicted full-year growth of -3.5%. Score -1.
- Corporate profit growth will continue to be strong. S&P 500 companies’ earnings will reach a cumulative $178 per share, up from an estimated $162 for 2019, a 10% increase. As of September 24, the consensus forecast for the year was $136, a drop of 16%. Score -1.
- While P/E multiple expansion is likely behind us, reduced trade tensions, easy monetary policy and strong earnings growth will produce high single-digit returns for U.S. stocks. Demonstrating that the economy and the stock market are very different things, the S&P 500 Index returned 18.4%. Despite the estimated 3.5% decline in GNP and the estimated 16% decline in earnings, the S&P 500 Index more than doubled the forecast. Score -1.
- Inflation will remain tame. Vanguard’s Joe Davis wrote, “Secular drags, including globalization, technological innovation, and well-anchored inflation expectations have been keeping inflation contained in recent years; and we expect this to persist over the medium and long term.” The consensus forecast of professional economists in the Philadelphia Federal Reserve’s 2019 Survey was for the CPI to increase at just 2.1%. The market certainly agreed, as the spread between 10-year TIPS and 10-year nominal Treasury bonds was only about 1.8%. The Philadelphia Federal Reserve’s Fourth Quarter 2020 Survey forecasted full-year inflation of only 1.24. While the COVID crisis negatively impacted the first two sure things, it helped this one. Score +1.