Penn Wealth Publishing

2020.01.05 Penn Wealth Report Vol 8 Issue 01

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6 penn wealth Report volume 8 issue 01 05 Jan 2020 Copyright 2020. All Rights Reserved. investment Intelligence tactical Awareness It was Wednesday, 19 Dec 2018, and the Federal Reserve governors in the FOMC meeting were in the midst of one of the most heated debates among mem- bers in recent history. About half argued that the Fed must raise rates to keep inflation in check and keep the economy from overheating. e other half argued that the economy was already cooling, inflation was virtually nonexistent, and that the body would lose credibility if it raised rates for a ninth time in three years. In the end, the hawks, led by Fed Chair Powell, carried the day. e Dow Jones Industrial Average went from up 300 to flat within minutes. As if that wasn't bad enough, Powell gave a disastrous press conference in which he telegraphed that at least two more rate hikes were probably coming our way 2019. ree trading days later, on Christmas Eve, all three major indexes had lost about 20% since the start of the fourth quarter. Perhaps the violent market reaction both sur- prised and shook Powell. Whatever the catalyst, he was singing quite a different tune in the year ahead. So here we sit, in the waning days of 2019, looking back at a year which saw three rate cuts, a 50-year- low unemployment level, decent to strong corporate earnings, and a 26% spike in the S&P 500 (32% in the NASDAQ) since the first trading day of the year. Geopolitically, the US and China have hammered out the first phase of a comprehensive trade deal, USMCA is all but approved, and Brits have sent the anti-Brexit forces packing following a landslide defeat. e most ardently anti-capitalist nominees for president on the Democratic side are slipping in the polls, and suddenly we are feeling a lot more sanguine about the year ahead. In our 2019 Market Outlook report, after noting global financial services firm UBS's rosy outlook for the year ahead ("S&P 500 will close out the year at 3,200"—nailed it!), we said that "We sincerely hope they are right...but hope is not a strategy...we must search for growth, but be hyper-vigilant." ey were right, and we stand by our comments: vigilance is the key. As we write this, we are more optimistic about 2020 than we have been at any other point, but sur- prises, by nature, come when we least expect them. e nightmare scenario. It may seem like an odd way to begin laying out our thesis for 2020, but let's imagine a nightmare scenario for the markets in the coming year. While an anti-capitalist theme is currently running through the Democratic candidates' talking points like a red ribbon around a basket of goodies (perhaps the basket contains a rice cooker like Fidel Castro gave every mother in Cuba one year), two candidates lead the socialist charge: Bernie Sanders and Elizabeth Warren. We see virtually zero chance of Bernie getting the nomination, but Warren actually sat atop the polls among registered Democrats as recently as October. To calculate her rise, simply pull up the performance of a basket of health care stocks and pinpoint the trough. Warren's decline began when she started bash- ing the likes of Leon Cooperman, a billionaire hedge fund manager—and lifelong Democrat—who gives an impressive percentage of his wealth away to char- ities. at incredible miscalculation on her part told us (and we ardent students of past US elections) that she doesn't have the political acumen to win the nomination. Nonetheless, suppose her grass-roots socialist sup- porters are more plentiful than we imagine, and she somehow rips the nomination away from the pre- sumptive winner, Joe Biden (or perhaps a surging Pete Buttigieg). en, between the nomination in July and the November election, let's suppose the economy takes an unexpected turn for the worse (the state of the economy virtually always wins or loses elections for an incumbent). If we enter a summer or fall recession, and Trump makes some serious blunders (which the press—his natural enemy—would magnify to the Nth degree), Elizabeth Warren could pull off a win in the general election. While the markets would react negatively to that event, she would have limited power to implement her socialist plans without her party retaining the House and reclaiming the Senate. Again, not outside the realm of possibility. If those three events were to hap- pen—a Warren presidency and a left-leaning House and Senate—cash is the winning style class for 2020. The year ahead will end up being a decent one for stocks, but buy some insurance for a scary first-quarter downturn 2020 Outlook & Strategy Asset Allocation & Outlook

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