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The Topsy-Turvy Twenties

Brace for good gains and jarring volatility in 2020

By John Lekas, Leader Capital

Market pundits are in a race to coin the perfect banner for the next decade: the Roaring Twenties has been done, how about the Soaring Twenties? (It rhymes!)

At Leader Capital, we have our take: The Topsy-Turvy Twenties. It is an apt tag, signaling an era that will offer even more volatility rather than less of it, and wild swings in investor sentiment and money flows among the different kinds of asset classes.

We got a stark preview of the Topsy-Turvy Twenties in the month of January. Fittingly, the notion among many traders is that as goes January, so goes the rest of the year. Volatility abounded in recent weeks.

The Dow closed on Dec. 31, 2019 at 28,538. By the end of the first 17 calendar days of the year, the index finished up 810 points or 2.7%. The Dow spent six days in a row over 29000—only to fall 1,092 points from the high. In just 14 days.

You would think there would be less vol. The China trade deal could ease tensions and reduce the Trump tariffs. Last week the Fed held firm on its no-hikes policy on interest rates. Any threat of impeachment of President Trump now has faded with the Senate’s vote to forgo hearing witnesses.

Nope. No way. Brace for more volatility. New fears about the coronavirus have taken hold, as some worried it could turn into a pandemic that might kill a million people—never mind that, so far, the casualty count is quite low. My worry is things could get worse before they get better on this front.

In the coming year, we foresee plenty of upside moves amid an abundance of volatility—and occasional flashes of unalloyed fear. Cue Bette Davis as the aging Broadway actress Margo Channing in “All About Eve,” after she gulps down a stiff martini and warns her entourage: “Fasten your seatbelts, it’s going to be a bumpy night!”

The fun part: we forecast Dow 30000 by August of the new year, reaching a remarkable milestone, up 435% from Dow 6900 at the market bottom in March 2009. The not so fun part: to get there, we may have to endure a wild downturn of 10% or more, first. Or a correction of similar magnitude sometime after clearing the 30K mark.

Even after accounting for this pullback, though, we expect stocks to end 2020 up “only” 7.5% on the year, a respectable gain on top of the unexpectedly robust 28% rise in stock prices for all of 2019. That would take the S&P 500 to 3450 from its recent 200-day moving average.

Better yet, we believe commodities will go up even higher than the rise in stocks. Gold, now at $1,560 per ounce and at a six-year high, could rise to $2,500 over the next year or two. That would be an incredible 60% surge in price.

Oil prices could rise almost 30% to $75 a barrel from $60 or so lately. As for prices at the pump, we see gasoline costs going up to $3.50 a gallon this year from $2.57 in the last week of 2019. That would mark a jolting 36% increase. Other commodities prices could rise in lockstep with gold and oil.

Why will commodity prices outrun the rise in stock prices in 2020? First up is a global economy on the mend and improving elsewhere in the world, including in China, Southeast Asia and Europe. This will ensure growing demand for commodities, and the U.S. is one of the largest suppliers in the world.

In addition, oil and gold prices reflect the fluctuating strength of the U.S. dollar versus currencies overseas. The weaker the dollar, the more dollars required to buy an ounce of gold or a barrel of crude.

The U.S. dollar is likely to get weaker before it gets stronger, owing in part to the federal government’s annual deficit. It could swell to $1.5 trillion in the next few years.

Other drains on the dollar: interest rates mired at multi-decade lows, and the Federal Reserve’s new moves expanding its balance sheet. The latter essentially increases the supply of money in the U.S. economy, and when the supply of anything goes up, the value-per-unit usually goes down.

These days the Fed trumps all else. We fixate on its stance on interest rates, and its whistling-past-the-graveyard watch on inflation and the expectations of consumers regarding where prices are headed. Fed Fetishists parse every syllable of its statements and pore over meeting minutes with a magnifying glass and a Ouija board.

The Fed’s predilection for low interest rates skews the markets in artificial and wacky ways. Dirt-cheap rates tarnish bonds as an investment vehicle and tart up stocks as the sexier option. Low rates also enable government to overspend more freely, racking up larger deficits and issuing ever more bonds that suck up investment capital that might have funded growing businesses.

Lately the Fed has been intervening in an arcane area of overnight lending known as the “repo markets.” It has done so to ensure liquidity and calm any potential for panic. Now its large role in repos poses a new set of problems. That’s another story, up next.


This commentary is intended to be general in nature, reflects our opinions and is based on our best judgment at the time of writing. No warranties are given or implied regarding future market activity. This commentary is not intended to be, nor should it be used as a substitute for individualized investment advice.  No specific decisions should be made based on this commentary. These opinions should not be construed as a solicitation for any service. Past performance does not guarantee future results.

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