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2020 Could Be A “Tough Year For Stocks” – Here’s Why

2020 Could Be A “Tough Year For Stocks” – Here’s Why

There are some key risks that could make for a shaky market this year.

The market has started 2020 off on a strong foot, but we may not be seeing record highs for much longer.

That’s according to a new report from Moody’s Analytics chief economist Mark Zandi, who says the market backdrop is starting to show signs of cracking.

“All of the pillars of the stock market look a bit shaky to me,” Zandi said. “While the economy will be okay in 2020, I think the stock market will have a rougher go of it.”

In his 2020 outlook, Zandi points too consumer spending, household balance sheets, jobs growth, and a strong housing market as bright spots in the economy, though he also sees slower expected real GDP growth in the year ahead, as well as a growing federal budget deficit, and a challenging corporate earnings picture as issues that could put pressure on the economy.

“Businesses are going to struggle with declining margin, and so corporate earrings growth will be flat,” Zandi said. 

Wells Fargo equity strategists Christopher Harvey, Gary Liebowitz, and Anna Han, are on the same page and said that the penalties for companies missing earnings expectations will rise in the first half of the year, setting up a market correction of between 5% and 10%.

“The consensus around stock prices is decidedly upbeat,” Zandi wrote in his outlook. “Few are expecting stock prices to rise as much in 2020, but even fewer are expecting it to be a tough year for stocks. We are.”

Zandi also cautions that that 2020 presidential election could hurt growth.

“The issue for 2020 is going to be the presidential election and the uncertainty that it creates,” Zandi said. “Business people, CEOs looking at that… they’re going to sit on their hands, and investment is going to be weak and soft.”

The Wells Fargo strategists also noted that the election uncertainty will keep a lid on speculation, which will likely result in lackluster returns through the third quarter of this year.

For his base case, Zandi sees the stock market ending flat for the year with GDP growth at 2%.

“That’s the average rate of growth we’ve been getting throughout the expansion,” he said. “I don’t think we get much more than that. I don’t see anything driving growth higher than that.”

Wells Fargo’s Harvey, Libowitz, and Han also cautioned that volatility could become more volatile this year amid optimistic sentiment, under-appreciated political risk, and a trade war that is far from over. They see the VIX, or Volatility Index which is known as the market’s fear gauge, experiencing more frequent spikes and higher highs in volatility, creating trading opportunities throughout the year.

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