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Byron Wien predicts S&P 500 will top 3,500 as Fed cuts rates

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Byron Wien (left), vice chairman of Blackstone Group Inc's private wealth solutions business, and chief investment strategist Joe Zidle predict that economic growth will trail forecasts and the central bank will lower its benchmark rate to 1 per cent.

New York

US stocks will extend their record-setting rally in 2020 as subdued economic growth prompts the Federal Reserve to cut interest rates, according to Byron Wien's annual list of surprises.

The S&P 500 will climb above 3,500 at some point this year, Mr Wien, vice chairman of Blackstone Group Inc's private wealth solutions business, wrote in a statement along with chief investment strategist Joe Zidle.

Economic growth will trail forecasts and the central bank will lower its benchmark rate to 1 per cent, they predict. The equity gauge recently traded at 3,234 and Fed's fund rate stood at 1.75 per cent while economists tracked by Bloomberg expect US gross domestic product to expand 1.8 per cent this year.

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"The economy disappoints the consensus forecast, but a recession is avoided," they wrote. "S&P 500 multiples remain elevated because monetary policy is easy and investors become more comfortable that intermediate interest rates will rise slowly."

Mr Wien, 86, a former Morgan Stanley strategist who's put out his "surprises" list since 1986, is one of the most widely followed on Wall Street.

A year ago, he predicted the S&P 500 would climb 15 per cent, with the economy continuing to expand and the Federal Reserve refraining from raising interest rates. The benchmark index rallied 29 per cent and the central bank cut rates three times.

Some of his forecasts for last year proved prescient, including a rally in Chinese shares and a flat US dollar. His optimism for a US-China trade deal to be reached in the first quarter, however, turned out to be misplaced. He also misjudged the chances for the UK to stay in the European Union and Theresa May to remain as prime minister.

For the coming year, Mr Wien and Mr Zidle predict that the US and China will not reach a comprehensive phase two trade deal. To spur growth, President Donald Trump will cut payroll taxes, they say. While US growth slows, foreign demand for Treasuries is expected to stay elevated as negative interest rates persist overseas. As a result, yields on 10-year Treasuries approaches 2.5 per cent and the yield curve steeps, they forecast.

Mr Wien says his surprise list is made up of events that investors assign 1-in-3 odds of happening but that he thinks are more than 50 per cent likely. Below are the duo's other calls for 2020:

  • Certain FAANG stocks (Facebook, Amazon, Apple, Netflix, Google's parent Alphabet) lose long-standing leadership as tech firms face growing political scrutiny and social blowback.
  • Boeing shares return as market leaders as problems with its 737 Max are fixed and deliveries begin.
  • Oil rallies above $70 a barrel as Iran steps up acts of hostility against Israel and Saudi Arabia.
  • A major auto-maker or technology company issues a statement that they're no longer developing self-driving technology after a series of accidents with experimental vehicles.
  • The Democrats take the Senate in November.
  • U.K. economic growth exceeds 2% with a workable Brexit deal secured; the country's stocks and currency rally. BLOOMBERG