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Predictions past and future

What does 2020 hold for your finances?

Gordon Pape makes some New Year predictions.By Gordon Pape, Editor and Publisher

Every year at this time I make some predictions for the year ahead.  I don’t use a crystal ball or a time machine (although I wish I had one of those).

Instead, I look at current trends and try to project what is likely to happen if those patterns continue. Sometimes they do, but it only takes one black swan to upset all the calculations. That may have happened on Thursday, with the killing of Iranian general Qassem Soleimani. To use one of Donald Trump’s favourite expressions, “We’ll see.”

Last year we were faced with a great deal of uncertainty, so I confined myself to two forecasts. The first was dead wrong – I predicted the TSX would outperform the S&P 500. My rationale was that the Canadian energy and banking sectors would bounce back from their dreadful performances in 2018 while in the U.S. the positive impact of the Trump tax cut would dissipate. In the end, both indexes did well, but the S&P 500 outdistanced the TSX by a wide margin.

My second prediction was more on the mark. I said that bonds would fare better than expected, due to a slowdown in the pace of rate increases. That was directionally correct but too conservative. I did not expect the Federal Reserve Board to do a complete about-face and cut rates three times. The end result was a gain of almost 7% in the FTSE Canada Universe Bond Index.

That was 2019. Now let’s look ahead to 2020.

Here’s what I expect to happen.

Stocks will be modestly higher

If history is any guide, the bull market should continue through 2020 but at a more modest pace. In the 17 U.S. presidential election years since 1952, the S&P 500 gained ground in 14 of them. But a repeat of last year’s advance of almost 29% in the S&P is highly unlikely. Back-to-back years of 25%+ gains have happened only three times since 1930. I look for the S&P to be ahead by 7-9% at the end of the year. The TSX target is 4-6%, based on lower GDP growth projections for our economy.

Interest-sensitive stocks will falter

We saw some surprising gains in utilities and REITs in 2019, due mainly to the turnaround in the Fed’s interest rate policy. But the rally was overdone, as we’re now seeing. The S&P TSX Capped REIT Index fell 3.4% between Dec. 10 and year-end while the Capped Utilities Index slipped 1.6% in the same period.

This isn’t the end of the world by any means. Most investors buy these securities for their high yields and the cash will continue to flow. But anyone who is expecting a repeat of the capital gains of 2019 will be sadly disappointed.

No recession – yet

The U.S. stock market looks overpriced, but President Trump can be expected to do everything in his power to keep the good times rolling until after the November election. Once that’s out of the way, it’s anyone’s guess. The Goldilocks economy has to come to an end at some point. If Bernie Sanders or Elizabeth Warren wins in November, it won’t take long.

Gold will do well

North Korea is making new threats and the Middle East powder keg may be about to blow. Gold feeds off the world’s miseries and should move sharply higher if tensions escalate.

Bonds will stagnate

The Federal Reserve Board has indicated no rate changes are planned in the near future and the Bank of Canada is in a similar position. Without any movement from the central banks, bond prices will wallow in the first half of the year. But if recession fears start to build as the year wears on, the Fed may go back to cutting again, changing the whole scenario.

With that, and with crossed fingers, I wish everyone Happy New Year.