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What's Next for 2020?

After a year like 2019, the obvious question looking ahead is how much higher can equities go? For many years, assets have been flowing into U.S. stocks on the back of a strong U.S. dollar and the United States’ perceived safe-haven status relative to other global economies. In this respect, 2019 was largely an exclamation point on the decade’s investment pattern.

Regarding our 2020 market outlook, there are reasons to be cautiously optimistic for financial markets. Accommodative central bank monetary policy and easier financial conditions should continue to support at least a modest rebound in global economic growth. As just one point of reference, the Global Manufacturing Purchasing Managers’ Index (PMI) has risen for four consecutive months and inched into expansion territory (above 50) in November. Along with reduced U.S.-China trade risk, this suggests the global economy may be on the rebound. The U.S. consumer also remains in good shape as ongoing labor market strength, wage growth, and low interest rates should continue to support consumer spending and the housing market.

However, this modestly positive stock market outlook is consistent with the consensus view, meaning that financial markets have already responded positively to these developments. The risk of an unpleasant market surprise or deterioration in the macro environment in 2020 shouldn’t be ignored.

Portfolio Positioning and Outlook

While we watch and weigh the ramifications of short-term risks, it’s important to reiterate that we don’t invest based on 12-month market forecasts. The uncertainty is too high and the unknowns too many. More important and most relevant for our investment process is our outlook for the next several years, not months.

U.S. stocks are expensive from a valuation perspective; however this has been the case for several years.  Valuation alone has not proven to a reliable predictor of short-term performance.   History does suggest over time, earnings must grow to justify stock prices.  Domestic companies are faced with a high bar to exceed current earnings expectations and to justify today’s price levels.  As a result of the current dynamic, we remain sensitive to the downside risk.

Should the positive global growth outlook for 2020 play out, we’d expect foreign stocks to outperform U.S. stocks, given their higher cyclicality and sensitivity to overall GDP growth. Receding Brexit uncertainty should also help prop up European markets, in particular. Furthermore, to the extent the U.S. dollar weakens in this environment—due to it being a counter-cyclical currency—that will help foreign stock returns (for dollar-based investors).

Our tactical exposures to flexible bond funds and alternative strategies are designed to manage  portfolio risk exposures in today’s environment and take advantage of market inefficiencies and opportunities when they appear. Not only do these strategies provide valuable portfolio diversification, but we also expect them to deliver better medium-term returns than a traditional mix of U.S. stocks and core investment-grade bonds.

Given this backdrop—weighing the shorter- and medium-term risks and return opportunities and considering the economic fundamentals versus financial market valuations—we think the wisest course for balanced investors continues to be a broadly diversified, moderately defensive posture.

As always, we appreciate your confidence and trust in us. We wish everyone a happy, healthy, and peaceful New Year.

 —OJM Group Investment Team

Suggested additional reading:

2019 Q4 Market
Key Takeaways