S&P 500 May Fall 20% in Early 2020, Bullish Ed Yardeni Says

The 2020 stock market forecasts are in: They predict single-digit growth, unblighted by a recession. But bullish sage Ed Yardeni has a different take. He thinks there will be a correction or maybe even a bear-market slide in this year’s first half.

The surging market, which kicked off the new year with a 0.84% rise Thursday, is getting ahead of itself and the rally may be unsustainable in the near-term, reasoned Yardeni, a former Federal Reserve economist and now head of Yardeni Research.

“I’m concerned about a possible melt-up,” he told CNBC. After such a continued surge, he finds that a market downdraft of “10% to 20% would be quite possible if this market goes to 3500 ahead of my schedule.” For the record, he doesn’t see a recession until after 2021.

Such an initial rough patch, he added, is likely considering the absence of any negative factors like a continued trade war or climbing unemployment. “Bull markets do best when you’ve got a wall of worries,” he said. “What I’m worried about is that nobody is worried anymore.” He plans to not buy any more stocks now and wait for the pullback when they are cheaper.

For more stories like this, sign up for the CIO Alert daily newsletter. 

What’s interesting about Yardeni’s first-half plunge scenario is that he believes that, after the unpleasantness, the S&P 500 will recover to indeed reach 3500. The index finished 2019 at 3231, so reaching 3500 would constitute an 8.3% advance. As bad news melted away in the autumn, the S&P 500 rose 28.9% for all last year.

His 2020 forecast places Yardeni, despite his first-half pessimism, in the upper reaches of Wall Street market estimates. Goldman Sachs, for instance, looks for a 5.2% increase this year, among the more optimistic predictions.

Certainly, analysts’ projections should be taken with a pound of salt. Bespoke Investment Group, for instance, has calculated that the year-end Wall Street annual consensus during this century foresaw a median rise of 9.8 over the ensuing year. But the actual outcome was just 5.5%. And the consensus held that stocks would rise in every one of the past 20 years, when they were down in six.

So, in forecasting a correction (a 10% dip) or a bear market (off 20%), however brief they may be, Yardeni is pointing out that, yes, these bad spells do happen.