The nation sailed by a big milestone in 2019 for the longest economic expansion on record and many economists expect the good times to keep on rolling. But there are plenty of variables looming in the year ahead, and quite a lot of disagreement about which way the wind might blow.
Some of the recent headlines make it sound like we have absolutely nothing to worry about. But as you know, the economy can often surprise us. I’m going to run through a few of the predictions I’ve been seeing in the news.
The first one is from Barron’s. It held an annual roundtable of investors and economists recently to talk about what might happen this year. There were 10 experts and they all agreed that there’s very little chance of a recession.
Economist Mario Gabelli predicts that stocks will rise in the first half of the year, and turn sour during the last three months due to uncertainty about 2021. He says: “A major agreement between the Democrats and Republicans on an infrastructure bill could change that outcome.” (1)
The roundtable group also says, we need to allow more immigration into the U.S. That could help the labor shortage. But they also believe President Trump will get a second term, so increasing the number of immigrants may be a long shot. As for the GDP, Newsmax quoted a few economists who are seeing 1.5% for the year. That would represent a slowdown from the unimpressive 2.1% we’re seeing now.
Urban Land Survey
A survey of economists by the Urban Land Institute shows a similar forecast. They say, “There is no end in sight for the long-lived U.S. economic and real estate market expansion.
The survey included responses from 27 economists and analysts at 24 top real estate organizations. They say the U.S. already weathered tough times this last year. Among the economic difficulties were an inverted yield curve, the trade dispute that has increased tariffs, the political divide we’re experiencing in Washington, and the President’s impeachment. But despite all that, the S&P 500 Index managed to produce a 31.5% return. As Urban Land reports, that’s the second highest in 23 years.
They say real estate investment trusts also did well, with a 25.8% return. And with low interest rates, they are feeling fairly confident about what’s ahead for the economy and real estate. Looking ahead to 2022, they feel the GDP will pick up a bit and hit 2%. They say employment growth will continue even though we have a shortage of workers and low unemployment. For real estate, they say transaction volume will be well above the long-term average, that investors will see 5 to 5.5% returns on unleveraged core private real estate, and that rents will continue to grow — for multi-families, about 2.7%.
When the economists were asked about the “next” recession, the answers ranged from this year to 2024, but the median wasn’t that far out. Most felt it would happen in 2021, but only two-thirds of them answered that question. Urban Institute says it indicates a lack of conviction about when that recession will hit.
Fortune magazine also did a poll on what investors are worried about and what they plan to do in 2020. (2) The survey included responses from more than 1,300 investors toward the end of December. 58% of those people feel that a recession is likely in 2020. Many of them also expect the presidential election will cause a lot of volatility. But despite the negative views, 76% believe the stock market will keep going higher and just 5% expect it to go down. The Fortune survey found that investors planning to buy more stocks outnumber those who don’t by 2 to 1.
Investors are bullish on returns. According to the Fortune survey, 20% of investors are expecting returns of 10% or more. 32% are expecting returns of 5 to 9%. And, 29% are expecting 1 to 5%. Only 4% expect to lose money and 13% didn’t express any expectations.
A majority plan to use the extra cash to boost their retirement contributions. More than half also plan to leave an inheritance for family or friends. So, they see 2020 as profitable.
Two Sides to the Economic Coin
Yes, there are two sides to every story and the debate over a 2020 recession is one of them. Thousands of experts gathered to talk about the economy for a World Bank forum. As reported by the New York Times and the latest “Global Economic Prospects” report, they called the current expansion “fragile.” (3) They expect a very modest amount of growth this year, but they say the downside risks outweigh those gains. Among the risks they are most concerned about are the trade disputes along with a more substantial slowdown in wealthy countries like the U.S. Some economists say the global manufacturing sector is already in a recession.
But recession may be too strong of a word. Of the CFOs participating in a survey by Deloitte, just 3% expect a recession. Most of the others expect a more manageable slowdown. That’s actually positive news, because last year 15% of the CFOs were predicting a recession. As reported by Newsweek, Deloitte’s Sandy Cockrell says, “If there is a trade deal with China, a lot of the cloud will go away.”
Value in Real Estate Investing
Whatever happens in the coming year, investors will probably not go wrong if they put their money in real estate. U.S. News and World Report published an article recently called, “Three Reasons to Invest in Real Estate During a Recession.” Here’s the list:
1 – Property investments can produce stable income
2 – Real estate may be less sensitive to volatility
3 – Property may outperform stocks and bonds
Of course, the performance of any real estate investment can vary, but it’s unlikely that the demand for rental property will go away. You may not want to count on appreciation during a recession, however. It’s the cash flow that is most important, and the gains in equity.
Recessions can also provide new opportunities for investment, if prices go down. It’s a matter of thinking ahead to what might happen, and thinking for the long-term as to how your investments could perform.
(1) Barron’s Roundtable: Newsmax