Following the October Fed meeting, analysts released a discordant array of FOMC postmortems which, taken together, suggested almost no consensus whatsoever with regard to the likely path of US monetary policy in 2020.
Goldman was pretty sure the Fed is done. Credit Suisse generally agreed. Barclays said that while October marked the “end of insurance”, another cut in December was still the most likely scenario (the bank would later change that call). BofA said another cut was likely, but not until 2020. SocGen said pretensions to being done notwithstanding, the Fed would resume cutting rates next spring. And BNP said the focus had shifted from insurance to data dependence, which pretty much by definition meant that if the data betrayed a deceleration in the domestic economy, the Fed would keep cutting.
Fast forward to December and, alongside the first unanimous FOMC decision since May, the new dots showed policy on hold through 2020.
To be sure, the data is now largely cooperating. If ISM manages a bounce for December, virtually everything will be moving back in the right direction, with the notable exception of business spending, which is still suffering amid lackluster CEO confidence, lingering uncertainty around trade policy and election jitters.
And yet, not everyone is convinced that the US economy is poised to log relatively robust growth in the new year.
The outlier is SocGen, whose economics team sees a mild recession in the US during Q2 and Q3, but at 1.8%, even the median growth estimate for 2020 isn’t ebullient.
Goldman’s forecast (2.3%) is nearly the most bullish of the entire sample, which accounts for the bank’s house call of no more Fed cuts in 2020. SocGen, on the other side, sees a pair of cuts in the first half.
As you ponder the outlook amid widely divergent views, it’s worth noting that the market has historically been no better than analysts when it comes to handicapping the Fed.
The following chart is a familiar one to most observers who keep themselves apprised of such things, but it’s always good for a chuckle. As Deutsche Bank’s Torsten Slok writes, “the market is almost always wrong about what the Fed will do”.
(Deutsche Bank)
As far as whether the market (in this case SPX) was “wrong” this year to surge nearly 30% in what may end up being the largest annual gain since 1997, Bloomberg’s Sarah Ponczek notes that “it’s rare, though not unheard of, for the economy to tank right after a rally as big as this one”.
Going back 90 years, there have been 17 annual gains of 25% or more for the S&P. Only three times has a recession come calling in relatively short order (1990, 1981 and 1937).
