No recession, the climate election, a closure in the Straits of Hormuz, and more?

Byron Wien, Vice Chairman of Blackstone Group, and Joe Zidle, Chief Investment Strategist in the Private Wealth Solutions group, released a list of “Ten Surprises for 2020.”

For 35 years, Wien has issued his forecast for the year ahead. He defines a surprise as “an event that the average investor would only assign a one out of three chance of taking place but which Byron believes is ‘probable,’ having a better than 50% likelihood of happening.”

Byron Wien, Joe Zidle, and the Ten Surprises for 2020

The following are the Ten Surprises for 2020 – unedited – from Blackstone Group’s press release.

1. The economy disappoints the consensus forecast, but a recession is avoided. Federal Reserve Chair Powell lowers the Fed funds rate to 1%. Without a comprehensive trade deal in hand, President Trump exercises every executive authority he has to stimulate growth and ward off recession. He cuts payroll taxes to put more money in the hands of consumers.
2. Concepts of inequality and climate change become important election themes, but centrist ideas prevail. The House of Representatives sends articles of impeachment to the Senate, but Donald Trump is not convicted or removed from office. Enough information is revealed in the proceedings to cause some of his supporters, as well as many independents, to throw their support to liberal candidates in 2020 state races. The Democrats take the Senate in November.
3. There is no comprehensive Phase Two trade deal that limits China’s ability to acquire intellectual property. National interests result in the balkanization of technology. The development of separate standards for 5G and other tech hardware proves to be bad news for the future of world economies. The move toward “decoupling” gains traction in negotiations with China. US economic co-dependence with China erodes. Both China and the US keep their hands off Hong Kong and let the protest settle down by itself.
4. The prospect of a self-driving car is pushed further into the future. A series of accidents with experimental vehicles causes a major manufacturer or technology company to issue a statement that they’re no longer developing self-driving technology.
5. Emboldened by the pain of economic sanctions, Iran capitalizes on a lack of American leadership abroad by stepping up acts of hostility against Israel and Saudi Arabia. The straits of Hormuz are closed and the price of oil (West Texas Intermediate) soars to over $70/barrel.
6. Even though some observers believe valuations are stretched, a surge in investor enthusiasm pushes the Standard and Poor’s 500 above 3500 at some point during the year. Earnings only increase 5%, and S&P 500 multiples remain elevated because monetary policy is easy and investors become more comfortable that intermediate interest rates will rise slowly. Volatility increases and there are several market corrections greater than 5% throughout the year.
7. Big tech companies face growing political scrutiny and social blowback. Once the market leaders, certain FAANG stocks underperform and the equal-weighted S&P 500 outperforms. There are popular plans proposed to break up the largest social media platforms and increase regulation and government oversight. This has greater success than prior government efforts against Apple, Microsoft, and IBM, because it has widespread support from the American people. A millennial in New York City puts their phone down and makes eye contact with another human and finds it non-threatening and refreshing.
8. Having secured a workable Brexit deal, the United Kingdom turns out to be the winner in its divorce from the European Union. The equity market rises and the pound rallies. The U.K. benefits from a long transition period and growth exceeds 2% as foreign direct investment resumes now that the outlook is clarified. The EU economy remains soft, and European markets other than the UK underperform the US and Asia.
9. The bond bubble starts to leak, but negative rates continue abroad. Even though the U.S. economy is slowing, the 10-year Treasury yield approaches 2.5% and the yield curve steepens. Japan and China pull away from the Treasury auctions. Rather than economic fundamentals or inflation, supply and demand drive yields higher.
10. The problems with Boeing’s 737 Max are fixed and deliveries begin. The plane becomes a fixture around the world, enabling airlines to operate more efficiently and increase profits. The stocks become market leaders.

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