By Vaughn Woods, CFP, MBA
Merry Christmas? That’s what Credit Suisse is predicting for 2020. If they are correct, it’s a scenario that sets up a grand year for investors and may spell the last leg up before the end of this economic cycle.
You’ve heard me say this, but again, the two best times to invest are the first twelve months at the beginning of an economic cycle and the last twelve months of the cycle. Both “best-times” are all about math. That is, investors price stocks by estimating future earnings and multiplying those earnings times a P/E or price to earnings multiple.
Here’s an example: A large publicly traded company earns $1. It grows at 10% yearly. Therefore, it is worth 10 times earnings or $1 x 10 = $10 per share. Multiples can go up and down. They tend to go up when TINA lives; an investment environment in which There Is No Alternative (TINA) to stocks. So, when fixed rate investments provide high returns multiples decline. But when fixed rate investments offer little opportunity for appreciation and the yield is low, multiples expand. So $1 worth of earnings times an expanded multiple looks like this: $1 x 12 =$12 or 20% higher value than a year in which multiples do not change or decline. Credit Suisse is predicting that multiples will expand in 2020. However, if earnings move up to $1.10 AND multiples expand to 12 the math works this way: $1.10 x 12 = $13.20 per share. So, a period in which both earnings and multiples are expanding is a wonderful time to invest.
However, before I leave you with the wrong impression there are no guarantees. Credit Suisse research never gets it all right. Investors will become overly optimistic and pessimistic at different times during 2020. There is commonly a 20% differential between the high and low end of the trading range each year and I do not expect 2020 will be any different. So, hedging risk, remaining nimble, and managing risk through diversification is key and what we do for you.
I’ve attached the Credit Suisse Economic Strategy Report for 2020.
If you don’t care to read the entire article, in summary: CS sees a rotation into value stocks followed by their preference of technology, discretionary, financials, industrials and materials. They expect the economic cycle to trough in the fourth quarter of 2019 before reaccelerating into 2020 and 2021. Since multiples expand when interest rates (initially) rise, this period is good for stocks. For 2020 CS puts S&P 500 earnings at $173 and for 2021 they estimate $181 in total earnings. Estimated multiples will expand to 18.9. So, they project investors will pay 18.9 times their expectation of 2021 earnings of $181 by the end of 2020 or $181 x 18.9 = an S&P 500 number of 3420.90. That’s 10.25% higher than the current value of the S&P 500 as of today’s writing.
Vaughn Woods, CFP,MBA
Investors should be aware that there are risks inherent in all investments such as fluctuations in investment principal. Past performance is not a guarantee of future results. Asset allocation cannot assure a profit nor protect against loss. Although the information has been gathered from sources believed to be reliable, it cannot be guaranteed. Views expressed in this newsletter may not reflect the views of Bolton Global Capital or Bolton Global Asset Management. The information provided her is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. VW1/VWA0240.
U.S. Equity Strategy, 2020 Outlook – EPS to improve, PEs to Expand, Credit Suisse, 18 November 2019