- The sentiment of business leaders at the World Economic Forum in Davos, Switzerland, has swung from upbeat in 2018 to somber in 2019.
- “You talk to enough people and you express your skittishness, and it echoes,” said Morgan Stanley CEO James Gorman. “By the third day everybody’s a little depressed.”
- Some, like Guggenheim’s Scott Minerd, view confidence at Davos as a type of contrarian indicator and are tempted to buy amid the mounting pessimism.
Fresh off one off Wall Street’s calmest years in modern memory, the head of the globe’s largest hedge fund raved about the state of the economy at the 2018 World Economic Forum.
“We are in this Goldilocks period right now. Inflation isn’t a problem. Growth is good, everything is pretty good with a big jolt of stimulation coming from changes in tax laws,” Bridgewater Associates founder Ray Dalio said in Davos, Switzerland.
“There is a lot of cash on the sidelines. … We’re going to be inundated with cash,” he added at the time from his seat on CNBC’s set. “If you’re holding cash, you’re going to feel pretty stupid.”
He wasn’t the only corporate leader touting a rosy outlook one year ago at Davos. President Donald Trump’s historic Tax Cuts and Jobs Act had pacified economic fears stemming from trade protectionism and tough immigration policy. The then CEO of Goldman Sachs, Lloyd Blankfein, talked about “animal spirits” being unleashed because of it.
But in the following weeks, the stock market plunged into a correction and the S&P 500 would go on to post its worst year in a decade.
This year in Davos, the sentiment of the business elite may have swung too far the other way, to much too negative given the current state of affairs.
“Everybody’s skittish, you talk to enough people and you express your skittishness, and it echoes and it just keeps compounding,” Morgan Stanley’s chief executive, James Gorman, who’s led the bank since 2010, told CNBC on Thursday. “By the third day everybody’s a little depressed, and I spoke at a dinner we hosted last night with a bunch of CEOs and clients and I said I don’t get it, I mean I don’t get it, we’re not living in a depressing economic world at the moment,” he added.
Asked on Tuesday by CNBC’s Andrew Ross Sorkin whether he sees any trouble ahead, Bridgewater’s Dalio reversed his tune from the year prior, and warned of a “significant risk” of a U.S. recession in 2020.
“It’s going to be globally a slow up. It’s not just the United States; it’s Europe; and it’s China and Japan,” the billionaire investment titan said. “Where we are in the later [economic] cycle and the inability of central banks to ease as much, that’s the cauldron that will define 2019 and 2020.”
David Solomon, who succeeded Blankfein as Goldman’s chief executive in October, also offered a chilly forecast and said he sees the chances of a recession rising steadily over the coming years.
‘Land of contraindication’
The contrast between the pessimism at Davos and the strong U.S. economy was enough to draw quips from other World Economic Forum attendees, including Guggenheim’s global chief investment officer.
“Coming [to Davos] last year, there was such euphoria after the tax cut, the stock market was making new highs,” said Scott Minerd, global CIO for $265 billion at Guggenheim. “This year, everybody’s concerns about economic slowdown, recession, the trade war. So I’m thinking to myself, time to go the other direction.”
“I got suspicious that this place is the land of contraindication,” he added.
For the time being, the U.S. economy remains healthy. The number of Americans filing applications for unemployment benefits fell to more than a 49-year low last week, according to the government’s latest report. Meanwhile. the government’s last look at real GDP showed that output increased at an annual rate of 3.4 percent in the third quarter of 2018. Job creation ended 2018 on a powerful note, with nonfarm payrolls surging by 312,000 in December.
The current earnings season also offers a positive signal. Thus far, more than 70 percent of companies in the S&P 500 that have reported earnings have topped consensus profit expectations on growth of about 11 percent, according to FactSet. Procter & Gamble, for example, beat the Street’s earnings expectations and raised its sales forecast, seeing strong demand across many products.
“I think we’ve got to put things in perspective. Davos people are in an environment of world leaders and they’re talking on a high level,” said Jack Kleinhenz, chief economist at the National Retail Federation, the world’s largest retail trade association. “When I talk to my retailers, they’re asking me ‘how do you see the consumer’ and ‘how might they might be positioning themselves in 2019?’”
“The consumer is not overleveraged, balance sheets are in a good position and gas prices are lower,” he continued. “I think you have to make a lot of assumptions if you think we are on a path to recession.”No more ‘rainbows and lollypops’?
Less can be said for the rest of the world, a fact that may be weighing on sentiment in Switzerland.
China, the world’s second-largest economy, is slowing. The country’s benchmark Shanghai Composite is down more than 26 percent over the past 12 months. Beijing and Washington are locked in a bitter trade dispute over the balance of trade and disagreements over the enforcement of intellectual property rights. And things in Europe aren’t looking great, either.
The pan-European Euro Stoxx 600 is still in correction territory, down more than 10 percent over the last 12 months.
“The global backdrop is more concerning now than it was last year. We’ve seen steady weakening in China and the Euroarea,” said Bank of America economist Michelle Meyer. “I think that last year there was lots of optimism about what would come from the [federal] stimulus. It’s certainly helped support growth, and consumer spending got a nice bump, but that growth has really slowed since then.”
Still, Meyer said that recession predictions are likely “premature” and that the typical recession indicators are not yet flashing red. More than anything, the lesson learned from Davos 2019 may be less about what business leaders expect than what they feel right now.
“We have heard very little doom and gloom yet, but we are less than 20 percent into the earnings season,” Art Hogan, chief market strategist at National Securities, wrote in an email. Davos 2018 happened right after “the corporate tax cut had passed, and analysts had not yet built it into profit forecasts. The market had just spiked by 7 percent in the first three weeks of 2018 in a crescendo of optimism. The backdrop was nothing but rainbows and lollypops.”
“Reality drives perception. But I would say this: Davos 2018 was super upbeat and 2018 ended down,” Hogan wrote. “I bet that the ultra-conservative Davos 2019 will end in better markets. There’s nothing like price to change sentiment.”