Zacks Investment Management

Zacks Investment Management sees the U.S. economy growing at a 2% to 2.5% clip in 2020,¹ which is arguably reason enough to be bullish in the new year. However, below we give you our three additional reasons to maintain a constructive outlook on stocks heading into 2020.  

Reason #1: Election Year = Political Gridlock²

In any given year, the stock market’s performance is influenced by a myriad of factors – economic growth, corporate earnings, inflation, interest rates, and valuations, just to name a few. But, in our view, ongoing analysis of S&P 500 returns in U.S. presidential election years reveals a common trend: Stocks deliver positive returns a majority of the time.

Going a step further to analyze the performance data, we found that – on average – the stock market delivers double-digit positive returns in U.S. presidential election years.

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Do You Know How These Economic Indicators Could Affect Your Investments?
 
It can be challenging as an investor to stay on top of all the important news stories and economic indicators that shape the market.
 
You don’t need to become an expert. However, having a grasp of key economic and financial statistics—from the inflation rate to the new corporate tax rate—can provide insight into how key variables might influence your returns, and could potentially help you reach your financial goals with more confidence.
 
If you have $500,000 or more to invest, get our free guide, 6 Essential Concepts to Help You Pursue Investing Success.³ It’s https://go.steadyinvestor.com/download-data-checklist?source=website=&medium=blog&term=steadyinvestor_blog_2019_12_16&content=data_check_list_guide a valuable resource that walks you through influential data, from the unemployment rate to corporate earnings, and our views on how these factors could affect your investments.
 
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S&P 500 Index Total Returns During Presidential Election Years (1928 – 2016)

In our view, these are more than just number-crunched statistics and it is more than just coincidence that stocks have tended to do well in election years. We believe that the equity markets ‘like’ political gridlock and political certainty. It generally means that new, consequential laws won’t get passed and businesses can operate without worry or concern that property rights, taxes, or regulations may suddenly change. In U.S. presidential election years, legislative efforts usually ground to halt as all attention and time is focused on the campaign. 2020 does not look to be any different.

With 2020 being a presidential election year, and based on historical data detailed above, can we reasonably expect positive returns for the S&P 500 Index next year? With the U.S. and global economy expected to produce modest but positive growth in 2020, and with corporate earnings poised to rebound from sluggish 2019 growth rates, we don’t see why not.

Reason #2: Corporate Earnings are Poised to Rebound

2018 was a year where most U.S. corporations greatly benefitted from tax cuts, posting sizable quarter-over-quarter earnings growth rates along the way. It follows that 2019 was a year where corporations had very high comparisons when it came to measuring growth, which predictably led to flat and negative earnings growth in multiple quarters throughout the year. Looking a bit deeper into the data, however, it is important to note that revenues and sales were on the rise even as earnings declined in Q3, which to us was a signal that underlying demand was/is holding up.

Looking ahead into 2020, S&P 500 corporations now have to meet a lower threshold (with 2019 comparisons) to post solid quarterly growth, and we’re expecting full year growth closing in at 10%.⁵ Though valuation multiples expanded in 2019 with the S&P 500’s strong rise, I still believe with close to 10% earnings growth there should be more wiggle room for the equity markets to track higher.

Reason #3: Everyone’s Worried About a Recession

Many ‘experts’ have been fearing a trade war since the trade war began, but worries have been gaining real traction since the yield curve inverted in May (it’s not inverted anymore) and data confirmed substantial weakness in the global and U.S. manufacturing sector.

Back in Q3, the Institute for Supply Management (ISM) reported that U.S. manufacturing remained firmly in contractionary territory, hitting its lowest level since June 2009. Everything was down: new orders, production, employment, imports, exports, and prices. Additionally, global manufacturing contracted in September, with nearly every major economy taking a hit.⁶

The “wall of worry” grew and is still growing, in our view, which we think should make you more bullish. The more that fear gets baked into the market, the higher the probability of a positive surprise driving markets higher, in our view. When an investor ignores the noise and analyzes the broader economic fundamentals, it becomes evident that the recession card may be overplayed – with the risk of recession already discounted into the market. In 2020, unexpected surprises on trade, growth, and earnings have the potential to rally the market and even potentially stimulate a broad rotation back into cyclicals. 

It can be challenging as an investor to stay on top of the unexpected surprises, important news stories and economic indicators that could shape the market in 2020. In addition to keeping up with news that could impact the market, it is important to understand key economic indicators and financial statistics that could influence your investments.
 
From the inflation rate to the new corporate tax rate, insight on these factors can help you better understand how these variables might influence your returns, and could potentially help you reach your financial goals with more confidence.
 
If you have $500,000 or more to invest, get our free guide, 6 Essential Concepts to Help You Pursue Investing Success.⁷ It’s a valuable resource that walks you through influential data, from the unemployment rate to corporate earnings, and our views on how these factors could affect your investments.

Disclosure