Are These Capital Markets Justified?
In 2019, financial assets will likely post some of the highest annual returns in the last decade, despite a tortoise-like economy. As of 11-29-2019, S&P 500 benchmark ETFs were up +27-28% year-to-date (YTD). Core holding bond funds are up +8-9% YTD, with some investment grade corporate bond funds posting +16-17% investment returns. Capital markets are hot.
The economy appears to simply be chugging along at a stable 2-3% growth rate. However, I believe that 2020 will be one of the trickiest markets to invest in the last decade. Why?
- 2019 Gains Driven by Increases in Valuation, Not Economic Growth: The heady stock market gains in 2019 were primarily driven by an increase in valuations (multiple expansion), rather than economic progress. In part, the markets recovered from dour expectations at the end of 2018. While possible, I believe another move up in valuations of this magnitude in 2020 is unlikely.
- Presidential Election: The 2020 general election promises to offer significant highs and lows, no matter what your political affiliation is. Key economic issues likely to affect the market will focus on taxation, government spending, regulation, and international trade.
- Economy: JP Morgan economists expect the US economy to slow down in 2020. Even if President Trump closes a Phase I Trade Deal, this group expects only a marginal improvement – +0.2% – to US economic growth.
- Trade Deal?: The trade deal announced in the fall 2019 has not been inked, but stock market valuations have increased significantly since the announcement of a potential deal. There is some risk that a trade deal will not occur, or if one is signed, it will be of marginal substance. On the other hand, a substantive trade deal would be widely viewed as a major positive for the equity capital markets.
- Jittery World Economy: The US economy has significantly outperformed every other developed market economy in the last few years. European and Japanese economies remain stagnant and face structural difficulties. The world’s second largest economy, China, is still growing 5-6%, is facing its own headwinds due to reliance on export driven growth (trade war) and infrastructure development (leverage). It is possible that 2020 will be the year the international markets catch up with the US capital markets.
How to Win This Race
In order to succeed, investors should focus on their mid- and long-term investment strategies while keeping an eye on the short-term risks. Once these financial objectives (and risk tolerance) are defined, identifying pockets of investment opportunities is much easier.
For instance, if the next few years look promising from an income generation perspective, then there may be some interesting investment options in the municipal bond area. For those with a 5-7 year investment time horizon, there are many riskier technology plays that may pan out in that time frame (but will be very volatile over that same period). For others that like to touch, see, and feel their financial investments, local real estate may be the way to go. Those that just want to lock in their gains and settle for solid and predictable results may want to consider a host of alternative asset possibilities.
Really, it is about looking at yourself, understanding your risk profile and selecting portfolio assets that match up well with those factors. If you are not quite sure how to do this, you should consider giving me a call. Let’s see if there would be a fit between your financial objectives and my experience navigating capital markets.