Like many of his peers in the Valley, legendary New York VC Fred Wilson - the founder of Union Square Ventures - is typically a dewy eyed optimist (just take a look at Union Ventures' many flailing crypto investments). But in a surprising twist, a list of Wilson's market calls for 2019 is so gloomy, it reads as if it were ghostwritten by SocGen's Albert Edwards.
According to Wilson, the S&P 500 will visit 2,000 (a roughly 500 point - 25% - drop from current levels) some time during 2019 as the bottom falls out of the global economy. President Trump will agree to resign after being impeached by the House following the publication of the Mueller report. And the slate of highly anticipated tech IPOs (Uber, Lyft, Airbnb etc.) will fall flat. In other words, 2019 will be a "doozy", as Wilson describes it.
Let's start with Wilson's call for stocks. Instead of the rebound expected by many Wall Street analysts higher rates, uncertainty in Washington, and global economic storm clouds exacerbated by Brexit and a slowing China will force business leaders in the US to become even more cautious. At the same time, rising interest rates will force companies to forego funding for marginal projects. And when marginal projects don't get funded, the economy is in trouble.
Because of this, Wilson expects the S&P will bottom at around 2,000, while trailing P/E falls to 15x...
...where Wilson expects it to remain for much of the year, leaving the ratio more closely aligned with historical averages.
I expect the S&P 500 to visit 2,000 sometime in 2019 and then bounce around that bottom for much of the year. This would represent a decrease in the S&P’s trailing PE multiple to around 15x which feels like a bottom to me given the recent history of the equity markets in the US:
The weakness won't be confined to the US. The rest of the world will also likely suffer, though several key unknowns, like the outcome of the US-China trade spat, are still unclear.
The global picture is not much better. The eurozone is about to go through the most significant change in decades with some sort of departure of the UK from the EU (Brexit). It remains unclear exactly how this will happen, which in and of itself is creating a lot of uncertainty on the Continent. I don’t expect most businesses in Europe to do anything but play defense in 2019.
Probably the biggest unknown for the global economy is the resolution of the ongoing trade tensions between China and the US. It seems inevitable that China will make some concessions to the US to resolve these trade tensions. But, of course, what happens in Washington (first issue) may impact all of that. In the meantime, the uncertainty around trade and exports hangs over the Chinese economy. China’s GDP has been slowing in recent years as it achieved relative parity with the US and the Eurozone:
Although tech investment is typically immune to macro trends, Wilson said he believes the drop in economic growth will hurt tech investment in 2019, possibly leading to a drop in investment compared with 2019. He also expects IPOs for Lyft and Uber to price "well below the lofty expectations."
So I expect that we will continue to see big tech invest and grow their businesses and do well in 2019. I expect we will see IPOs from big names like Uber/Lyft/Slack, although I also expect those deals will get priced well below the lofty expectations they have in mind right now. Some of that will be because of weak equity markets in the US, but it is also true that most of the IPOs in 2018 also priced below the lofty “going in” expectations of founders, managers, boards, and their bankers. The public markets have been much more sanguine about value than the late stage private markets for a long time now.
However, I do think a difficult macro business and political environment in the US will lead investors to take a more cautious stance in 2019. It would not surprise me to see total venture capital investments in 2019 decline from 2018. And I think we will see financings take longer, diligence on new investments actually occur, and valuations to come under pressure for even the most attractive opportunities.
But all of that is going to happen at the margin. I expect 2019 to be another solid year for the tech/startup sector as we are in a possibly century-long conversion from an industrial economy to an information economy and the tailwinds for tech/startup vs the rest of the economy remain in place and strong.
But perhaps his most extreme projection is that Mike Pence, not Donald Trump, will be president by the end of 2019. The Democratic-controlled House will initiative impeachment proceedings against Trump following the publication of the Mueller report. That will be followed by a trial in the Senate, which Wilson believes will go so badly for Trump, he will be forced to accept a Nixon-style deal where he agrees to step aside to avoid prosecution for himself and those close to him.
I believe that we will have a different President of the United States by the end of 2019. The catalyst for this change will be a devastating report issued by Robert Mueller that outlines a history of illegal activities by our President going back decades, including in his campaign for President.
The House will react to Mueller’s report by voting to impeach the President. Which will set up a trial in the Senate. That trial will go so badly for the President that he will, like Nixon before him, negotiate a resignation that will lead to him and those close to him being pardoned for all actions, and Mike Pence will become the President of the United States sometime in 2019.
I believe this drama will play out through most of 2019. I expect the Mueller report to be issued sometime in the late winter/early spring and I expect an impeachment vote by the House before the summer, leading to a trial in the Senate in the second half of the year.
As one might expect given his heavy exposure to crypto, Wilson echoed comments by Mike Novogratz and Tom Lee by declaring 2019 will be the year that crypto bottoms, and that many of Union Ventures' crypto investments will soon start to produce positive returns.
Wilson acknowledged that these predictions might sound dire, but insisted that he's still an optimist. But the fact that a Silicon Valley VC has an even more pessimistic outlook for the S&P 500 than Wall Street analysts, who are typically bullish by design, should raise some questions in and of itself.