It’s finally 2020. Over the holidays I recalled a conversion I had with a colleague where in early 2019 we spoke about the results of the Q1 2019 CFO Survey, which had the headline “Recession Expected by Late 2020” and stated that “Sixty-seven percent of U.S. CFOs believe that the U.S. will be in recession by the third quarter of 2020, and 84 percent believe that a recession will have begun by the first quarter of 2021.” I felt this was meaningful as the CFO Survey results are aggregate of around 500 CFOs based in North America, so it had some representation of what CFOs think.
As it’s now Q1 2020, I felt it’s only fitting to go back to check up on the results of the survey over the course of the year and see how their predictions changed over time, here they are:
Q1 2019 results: 67% predict recession by Q3 2020, 84% predict Q1 2021
Q2 2019 results : 49% predict recession by Q2 2020, 69% predict Q4 2020
Q3 2019 results : 53% predict recession by Q3 2020, 67% predict Q4 2020
Q4 2019 results : 52% predict recession by Q4 2020, 76% predict Q2 2021
There’s a few interesting observations. First, at least half of CFOs believe a recession is just around the corner (6-9 months out), while the significant majority (70-80%) believe a recession will happen within 12 – 24 months. Second, it seems these timelines gets postponed a little quarter. Most like the dangling a carrot in front of the horse.
One thing to note however, and this seems evident in the fund manager circle as well, is that a good number of people seem to think there’s some market risks around the mid-2020 election time frame, and to an extent, increased market volatility. The CFO survey results is also consistent in this regard, having a recession expectation around this time frame in each of their last 4 survey results.
The other thing that’s been going around is that it seems most firms predicts 2020 to enjoy some modest stock growth based on what ever reason they choose to use this time. So to summarize, it seems census believes:
- Market risk around US elections
- Increased market volatility
- Modest market growth
For the most part I think these predictions are pretty reasonable. I think the folks who are buying utilities to be more defensive are taking it a tad too extreme (I also believe utilities are over priced at the moment, but that’s a separate post). I don’t think 2020 will be too bad, but it may be painful for some. I don’t think 2020 will be too great, but we’ll likely see modest gains across the market.
In terms of portfolio strategy for 2020, we are likely to raise cash while reduce holdings in stocks with the lowest expected returns (the least favourite of our favourites), as well as stocks that require the longest timelines to play out. We are also likely to sell into highs and buy lows, consistent with our belief that we’ll see some volatility (opportunity) and overall market gain for 2020.
Also, if volatility increases meaningfully, we’re likely to write options around our favourite names.