By Marc Pfeffer, Chief Investment Officer
As we saw coming into 2019, the best laid plans generally miss the mark when predicting markets. This is one reason the individual investing experience of many investors lags the market by so much. Forecasting is a tough business. But investment planning doesn’t need to be.
Stock Market Outlook
It seems like most market “experts” are expecting positive returns to begin 2020 and a bumpier, cloudier ride for the second half of the year. I think the market will end up surprising more in the first half. We ended 2019 with positive news about the Fed, Brexit, and tariffs. If all of those hold to form, I believe the market could easily experience double-digit returns to open up the year. CEO confidence and spending has likely been held back on tariff concerns, so a technology spend could be on the horizon. However, if one, or all, of these three positives are reversed, the market could drop quickly and sharply. I expect volatility to increase significantly and unexpectedly.
Earnings should be a bit better, but I expect sectors such as energy to continue to lag.
With the U.S. equity market appearing expensive and bonds also looking rich, I expect beaten down/underperforming areas to outperform. Emerging markets are a good place to start. While I have been negative on commodities, if the reflation push takes hold commodities could also do well.
I still like financials on a steepening curve and potentially higher interest rate trades. Also, I expect financial firms to continue to get leaner, which should help the bottom line. Hiring younger, cheaper employees for the majority of the workforce continues to be in vogue with the exception of compliance personnel.
Bonds in 2020
As for fixed income, the bigger risk lies in higher rates. But, as we saw in the third quarter of 2019, markets and housing have a hissy fit when the 10-year Treasury rises above 3%. I would continue to advocate being diversified amongst sectors, including bank loans and emerging market debt, with high yield sprinkled in, versus owning some longer-dated Treasuries in case the economy takes an unexpected downward turn.
Overall, I believe 2020 shouldn’t look anything like 2019 for bond returns. It will be tougher sledding. Eking out positive returns and collecting a coupon is the best investors should look for, in my opinion. Also, investors may receive diversification benefits from utilizing active fixed income.
General Economic Forecast
GDP growth has been between 2% and 3% following the tax cuts of 2018. If a tax cut 2.0 is not implemented, I see growth remaining in the lower end of that range. Where would more growth come from? I don’t see it.
Monetary policy is expected to be on hold for 2020. If there is a move, I expect it to happen in the third quarter. The Fed tends to stay on the sidelines during peak election season.
Fiscal policy continues to be a mess. Deficits keep growing, and an end doesn’t appear to be on the radar. An additional tax cut or even slower-than-expected growth will only add to it. In all likelihood, nothing out of Washington will be accomplished in 2020. It will be a lost year.
Interest rate sectors, such as housing and autos, should continue to follow the overall economy. A strong job market will be key. The SALT states (high-tax states that have capped state and local tax deduction), including New York and California, will continue to see outward migration, and inventories should grow. Also, as baby boomers age, they will look to head south for warmer weather and cheaper housing.
Inflation could surprise to the upside if reflation holds, but there always seems to be deflationary headwinds to keep it in check. I am not sure when we will ever see consistent, persistent inflation again, which is what Fed Chair Jerome Powell said he needs to see before raising rates again. Personally, I think Powell is a fantastic Fed chair. Perhaps the best of our adult lifetime.
I watch the presidential debates regularly and have a pretty strong opinion on them. Right now, there doesn’t seem to be a candidate (including Michael Bloomberg) who has even a puncher’s chance of defeating President Trump. As we know, it still comes down to a handful of states. So going after those will be key, sort of like drafting a really good tight end in a fantasy football league.
As an avid sports follower, and someone who feels he could have been a GM in any of the major sports in 2020, I think live sports are the ultimate in reality TV. I expect the AFC Champions, the Chiefs, to win the Super Bowl. I believe this is the end of the Tom Brady era. Mobile, athletic quarterbacks are here to stay, and the cerebral, slower QBs are fading. Perhaps Aaron Rodgers or Drew Brees has one more run in them.
In basketball, if Lebron James and Anthony Davis can stay healthy, everyone wants to see that matchup against the LA Clippers in the Western Conference finals to take on Giannis Antetokounmpo and the Milwaukee Bucks, who should win it all.
I expect the Yankees, as Billy Joel sang in Zanzibar, to “grab the headlines all the time” and come out victorious in baseball. I love hockey, and my kids play it and follow it, but it still doesn’t seem to be able to catch on mainstream enough. Does anyone really care about any player on the San Jose Sharks? Better yet, can anyone name a player on that team? Just one!
I believe the old cliché of staying diversified, balanced, and even-keeled emotionally will continue to offer investors their greatest investing experience. Outside of getting lucky in some get-rich-quick scheme, which are few and far between, I believe investing is one of the most accessible ways to accumulate wealth over a lifetime with very little effort. It just takes discipline.
That’s all I got. Hope this helps.