Risk assets are pricing in nearly 3% growth in the US for 2020, and that simply isn’t likely to occur.
That’s the message from Joseph Davis, Vanguard’s head of investment strategy and global chief economist.
To be clear, Wall Street is not calling for anything close to 3% growth stateside, even if nobody but SocGen is openly predicting a recession. Indeed, consensus expects 1.8% growth next year. No estimate is higher than 2.4%.
If Davis is correct that risk assets are reflecting expectations for 3% growth, then he’s almost surely correct to suggest they’ve overshot. After all, the only people on planet Earth (well, besides investors, apparently) who expect the US to log 3% growth going forward are named Donald Trump and Larry Kudlow.
“Across the board, expected returns for most strategies are below trailing three-year returns”, Davis told Bloomberg, in an interview. He also called US equity volatility “unsustainably low”, and contends there’s a 50% chance of a correction in the new year.
On the volatility front, note that although 2019 has indeed been a year of subdued cross-asset vol. (with a remarkable placidity setting in during the first two weeks of November) we still have not returned to the halcyon days of the low vol. bubble in 2017.
As far as corrections go, there hasn’t been a drawdown of 10% or more in a year.
“The average drawdown in a given year [since 1928] has been a decline of 16.3%, and in 58 of the 92 years, there has been a decline of at least 10%”, Bespoke said last week, noting that “while years with a drawdown of at least 10% aren’t uncommon… the maximum drawdown for 2019 has been less than 7% [despite] no shortage of potential headwinds”.
Broadly speaking, Vanguard’s Davis believes investors have simply priced in too much optimism headed into the new year, and says a simple look at P/E ratios underscores the point.
For anyone looking for opportunities, he did suggest that Value stocks may be attractive. That’s a familiar refrain amid a record disparity between unloved cyclicals and bubbly bond proxies.