All of a sudden the doom-and-gloom crowd has lots to crow
about: China is suffering a scary slowdown, Latin America is
imploding and geopolitical threats are on the rise. And the U.S.
stock market is off to its worst start to a year. Ever. Yet the optimists
at Morgan Stanley believe the American economy will not only withstand this
global turmoil, it may keep growing until at least 2020. That would make the
much-criticized recovery from the Great Recession the longest U.S. expansion in
the post-war period. Last week during the market mayhem Morgan Stanley
reiterated its 2020 call, pointing to evidence that suggests the U.S. economic
expansion isn't ready to call it quits just yet. Here's a recap of why the
economy could just keep chugging along:
1. Fundamentals are
looking solid: The latest economic reports suggest the American economy
continues to look like the best house in a bad neighborhood. The U.S. added
about 200,000 jobs a month in 2015, its second-best year of
employment gains since 1999. The labor strength is buoying consumer
confidence, a powerful force in an economy that is mostly driven by consumer
spending. The University of Michigan's consumer sentiment index averaged 92.9
last year, the highest since 2004. That's a big improvement from the 2008 low
2. Fewer Americans
are drowning in debt: Consumers have been hard at work repairing their
balance sheets. Morgan Stanley notes that the amount of debt relative
disposable income has come down a lot. It currently stands at about 106%, down
from 135% in 2008. The ratio of payments to after-tax income has slipped near
the lowest levels of the past three decades. In another sign of improved
finances, the percentage of loan balances that are over 90 days delinquent
recently fell below 4% for the first time since the recession ended.
3. Corporate America
isn't overly exuberant: Morgan Stanley sees little evidence that CEOs
have overextended themselves into a situation that will create a bubble. If
anything, big companies are still reluctant to splurge on big items that drive
growth. For instance, capital spending declined in key sectors like energy,
materials, telecom and consumer staples during the third quarter.
Morgan Stanley expects the ratio of capital
spending-to-sales at S&P 1,500 companies to slip to 4.6% by the end of
2016, excluding energy and utilities. That metric stood at 6% and 9% before the
last two recessions. Big companies have also dramatically improved their
balance sheets. S&P 500 companies have a very manageable $100 billion of
loans coming due this year and just $300 billion in 2017, Morgan Stanley says.
Nonfinancial companies in the S&P 1500 are also sitting on an incredible
$1.7 trillion in cash.
Citigroup: 65% of
recession in 2016
Of course, there's no guarantee the U.S. economy will keep
growing for the next four months, let alone the next four years. The Atlanta
Federal Reserve's GDP Now forecasting model thinks growth in the fourth quarter
of last year slowed to an anemic pace of just 0.8%. Other Wall Street firms are
more pessimistic than Morgan Stanley. Even before chaos erupted in China,
Citigroup warned last month there is a 65% of a U.S. recession in 2016. In the
longer term, the American economy is susceptible to unforeseen shocks. After
all, few in 2006 thought the U.S. was about to enter its worst recession since
the Great Depression.
If no recession,
S&P 500 could soar 50%+
But if Morgan Stanley is right and the U.S. economy keeps
growing until 2020, the current expansion that began in mid-2009 would take the
crown as the longest post-World War II expansion, dethroning the one that took
place between March 1991 and March 2001. That would be very good news for the
U.S. stock market, which is struggling to fight off another China-fueled panic
attack. If the economy keeps growing, Morgan Stanley thinks corporate profit
growth could lift the S&P 500 to 3,000 by 2020. That would represent a 56%
surge from the index's depressing close of 1,922.
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