2020 Market Outlook

By LCK Wealth Management on December 30, 2019

Politicians and global centrals banks borrowed from the future to sustain the economic expansion in 2019, reminding us of Moody Blues’ “Days of Future Passed”. Hardly any economist expects a shift in policy, and if that’s the case, the Cars’ “Let the Good Times Roll” could be the theme for 2020.

Economies are generally expected to grow, albeit at a slower pace, limiting return potential while politics are likely to increase return volatility. New trade agreements, such as the United States-Mexico-Canada Agreement (USMCA) and Phase One of the China Trade Deal, should help alleviate global uncertainty and provide a tail-wind for overseas markets. The combination of slowing growth and increased volatility suggests we invest selectively.

Opportunities

1. International trade resolution among North America and China
   • Lowers economic uncertainty
   • Adds to U.S. and International Gross Domestic Product (GDP)

2. The Federal Reserve System (the Fed)

• In 2019: three interest rate reductions to fed funds rate (affects lending rates)
  • Lowered corporate borrowing costs
  • Enhanced opportunities in real estate, industrials and private equity

3. Demographics
   • Millennials
   • Nearing age to buy homes
   • Nearing age to raise families
   • Entering their highest expected productivity and income years
   • May increase investment and spending, which would improve global GDP

• Global Middle Classes
  • Rising global middle class, particularly in emerging economies, is expected to increase spending and increase GDP.

Source: OECD

4. Innovations in automation and robotics

• Increased productivity
• May alleviate global challenges related to
  • Aging populations
  • Water shortages
  • Low wage work

Risks

1. Global geopolitical uncertainty
   • Political polarization causing dramatic swings in policy
   • Corporate leaders prefer clarity for planning

2. United States corporate earnings growth is slowing
   • Tax cuts and lower interest rates have delayed a recession but not eliminated the business cycle
   • Corporate and government debt levels remain high

3. Stock prices are high relative to earnings
   • Price to Earnings (P/E) ratio is one of many valuation metrics
   • SP 500 Price to Earnings ratio is above the historical average

Source: Bloomberg 12.27.2019

4. Student debt has increased dramatically, limiting consumption

Recommendations

1. Increase equity allocations to foreign markets
   • Outside the US, the world is just starting to recover from the financial crisis
   • Expect reduced investment returns of mid single digits for US stocks

Source: Bloomberg 12.27.2019

2. Reduce fixed income holdings
   • Expect reduced bond returns of low single digits
   • Equity total returns are more likely to accomplish income needs than interest and dividends alone

3. Maintain some liquidity
   • Maintain one to two years’ worth of liquid investments for retirees
   • Be prepared for short term market shocks as market strategists expect a correction in 2020

4. Invest throughout your lifetime
   • Save
   • Invest consistently and systematically
   • Concentrate on your goals (not media noise)
   • Invest to enable your money to compound over time

Source: New York Times: How to Win at Retirement Savings; by Ron Lieber and Todd St. John