From an economic and capital market standpoint, 2019 might\nbest be remembered as a year where the trade war dealt some light blows to\nbusiness investment and overall growth, while dovish monetary policy supported\na surge in stock prices. Investors who kept their cool at the turn of last year\n\u2013 when downside volatility ripped through the equity markets \u2013 were rewarded\nfor their patience.<\/p>\n\n\n\n
So, what\u2019s ahead for 2020? Below, I offer four forecasts I\nthink could play out in the new year. <\/p>\n\n\n\n
Volatility and\nCorrection Coming <\/strong><\/p>\n\n\n\n If you look at the S&P 500 over the last 38 years\n(1980-2018), you\u2019ll find that not only are corrections frequent, they have been the norm<\/em>. The average\nintra-year correction for the S&P 500 since 1980 is -13.9%! In fact, it has\nbeen very rare to get a year where the S&P 500 doesn\u2019t fall at least -5% at\nsome point within the twelve-month period. It\u2019s only happened twice in the last\n38 years (1995 and 2017), when the S&P 500 declined just -3% intra-year. <\/p>\n\n\n\n In 2019, the biggest drawdown we saw was -7%, making it a\nbelow-average year for equity market volatility.1<\/sup> In 2020, I think\nwe\u2019re going to see a correction more in-tune with the longer-term average, and\nI think it would be wise for investors to mentally prepare for it.<\/p>\n\n\n\n _____________________________________________________________________<\/p>\n\n\n\n How<\/a><\/strong> <\/a>to Prepare for a Potential Correction?<\/a><\/strong> If you have $500,000 or more to invest and want to learn more about these forecasts, click on the link below to get your free report today! _____________________________________________________________________<\/p>\n\n\n\n History, and the normal and natural nature of stock market\ncorrections, compel my view. But there is also strong evidence that investors\nare becoming more optimistic and confident, which in my view tends to make the\nmarket more vulnerable to selling pressure. The American Association of\nIndividual Investors (AAII) found in its most recent survey that \u201coptimism rose\nto its highest level in a year, while pessimism fell to an unusually low\nlevel.\u201d3<\/sup> CNN also publishes a Fear & Greed index showing that\n\u2018greed\u2019 is on the rise. The more that confidence and optimism build, the higher\nthe probability of a correction, in my view. <\/p>\n\n\n\n Further Isolation\nfrom China<\/strong><\/p>\n\n\n\n Markets cheered the most recent truce reached between the\nU.S. and China, and it feels for now like the world\u2019s two biggest economies\nhave hit the pause button on tit-for-tat tariff levying. But recent history\nsuggests, in my view, that China is likely to fail to follow through on some of\nits promises, or renege on the agreement altogether. <\/p>\n\n\n\n For example, according to U.S. negotiators, China has\ncommitted to agricultural purchases to the tune of at least $40 billion for the\nnext two years, an exorbitant amount by historical standards. In fact, $40\nbillion of agricultural purchases would amount to almost double the record<\/em> for what China has purchased from American\nfarmers in previous years.4<\/sup> China has growing demand for soybeans\nand pork, sure, but are they really going to double spending to reach the\ntarget? China has done enough overpromising and under-delivering over the years\nfor me to remain skeptical.<\/p>\n\n\n\n Cyclical Surprise <\/strong><\/p>\n\n\n\n I wrote a Mitch on the\nMarkets <\/em>column in October 2019 where I pointed out that I\u2019d been \u201cobserving\na notable rotation away from cyclical sectors and towards defensive sectors.\u201d I\nalso noted in the column that there were nearly \u201c2.5 times the amount of put\noptions on the S&P 500 Index as there [were] call options, and the cost of\nhedging [had] soared to one-year highs across several equity benchmarks.\u201d5<\/sup><\/p>\n\n\n\n My conclusion: investors were getting too defensive and that\nopened the door for cyclicals to outperform looking ahead. <\/p>\n\n\n\n Cyclicals\nhave rebounded since, and in 2020 if we have a global economic recovery, we may\nsee corporate earnings growth that spurs this rotation even further. With\noptimism on the rise and the Fed likely remaining on the sidelines with no\nplans to tighten, I think cyclical, \u201cgrowthy\u201d categories will continue to do\nwell and have the possibility to surprise to the upside. However, an investor\nalways has to be somewhat cautious about buying stocks where the earnings\ngrowth is anticipated by the market but not yet reflected in earnings estimate\nrevisions.<\/p>\n\n\n\n Income that Isn\u2019t\nRisk-Free <\/strong><\/p>\n\n\n\n As mentioned above, the Federal Reserve is likely to remain\non the sidelines for much of 2020, in my view, unless there is some unforeseen\ncrisis or negative surprise on growth and employment. On a global level, major\ncentral banks appear committed to continued easing, which should keep a ceiling\non interest rates and risk-free bond yields. For the millions of retirees out\nthere, and for those planning to retire in 2020, that may mean having to look\noutside of risk-free Treasuries to generate income in your portfolio. <\/p>\n\n\n\n Fortunately, I believe investors can generate yield in other\nways without substantially increasing your portfolio\u2019s risk profile. For\nexample, you could explore the municipal bond market, investment grade\ncorporate bonds, and even dividend stocks as alternatives to create cash flow in\nyour investment portfolio while controlling for risk. <\/p>\n\n\n\n Bottom Line for\nInvestors <\/strong><\/p>\n\n\n\n Looking back at the last two decades, we find that equities\nhave returned just higher than +10% in years when real GDP and inflation (as\nmeasured by CPI) were both in the range of 1.5% to 2.5%. In my view, the U.S.\neconomy should generate real GDP right in the 2% range for 2020, and I believe\ninflation should at least notch 1.5%.6<\/sup> In other words, I believe\nconditions should be good for solid, perhaps high mid-single digit growth in\nthe new year. <\/p>\n\n\n\n
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This report will provide you with our forecasts along with additional factors to consider:<\/p>\n\n\n\n
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