Market Outlook 2020

Protection Point Advisors: Market Outlook 2020

• Stocks: Expect lower returns for US Stocks. Although the economy is supported by solid fundamentals, we expect the economy to slow through 2020, as valuations get stretched. Trade deal successes could drive returns significantly higher, as world economy gets reenergized. However, the general international trend is slowing, led by manufacturing. Without several major trade deals, International stocks are expected to continue to slow, and this represents the largest risk to the US stock outlook. Notably, two of our research groups are projecting a 15% growth in US stocks next year, which represents the high side of estimates. Because of trade, our election cycle and international uncertainty, expect higher volatility.

• Recession: No recession projected in 2020; however, 2021 is less certain. We are definitely in the later stages of this long cycle. Most economic cycles last 5-7 years, but this current growth cycle has lasted 10+ years. It could continue for another 2 years or longer, or not. However, one indicator is large building projects. In private conversations, we have been told that in the case of a large CA building firm they usually have a 3-year backlog. Currently, they are booked for 2020 but have very little work booked for 2021.

Trade Deal: Trade deals are being approved, such as USMCA with Mexico. A new deal with England is likely. China has recently agreed to a “phase 1” partial deal. However, future deals likely will depend on election sentiment. If the current administration gets weaker or less likely to win in November, countries might delay agreement, hoping for a better deal with another administration. Speculation on trade deals will likely cause stock volatility. There is some question if the US actually wants a full trade deal with China. Strategically, it might be better geopolitically if China is weakened, since their interests and goals are not the same as ours. China exerts significant influence across the world and the recent NBA censorship issue in the US and project approval or script changes in the US movie industry are examples of how much influence they have. It should not surprise people if the US decides to make future deals harder to accomplish.

• Low Interest Rates: In 2019, there were three interest rate adjustments. For 2020, we expect no changes. While the longer-term direction of rates is up, we expect interest rates to stay in the lower range for a long time.

Support to US economy Through Currency Demand: While rates in the US are very low, in many places in Asia and Europe interest rates are actually negative. The result of this dynamic is that many international investors get better returns in US bonds than they can get locally. This trend is expected to continue, creating a currency demand that acts almost like a quantitative easing program in the US, defunding some international economies and creating more opportunities in our economy. This influx of capital reduces recession worries and shortens the length of a recession that might come. Currently, the US has one of the best economic stories to tell.• Yield Investments are Good Solutions: Going forward, yield investments are good solutions. Stock returns may be lower with increased volatility, so yield investments are a better trade, from a risk/reward perspective. Also, as demand for yield investments go up, there could also be a capital gain opportunity. One area that we really like is Structured Income positions, which can yield 5-7% and dampen volatility. Exactly when to make some percentage shift away from stocks is the question, which is being addressed with each client individually.


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