2020 investment outlook

By Anthony Saglimbene, Ameriprise Global Market Strategist

As of 1/10/2020


Looking back                 

  • The S&P 500® Index is coming off its best year since 2013.
  • Washington and Beijing finally signed a ‘phase one’ trade agreement.
  • The market largely ignored the recent flare in United States and Iran tensions.   

Up ahead

  • The Senate could soon begin the impeachment trial of President Trump.
  • Stocks and bonds could see positive but modest gains in 2020.
  • We expect a dynamic market environment, including periods during which stock prices could experience downside pressures.

 

Data Source: FactSet

The bull keeps charging

The past year proved surprisingly strong for U.S. stocks and certain bond types. The S&P 500 Index returned more than +31% on a total return basis. Meanwhile, investment-grade and high yield bonds each returned more than +14% in 2019, one of their best performances of the decade.

In the final weeks of 2019, the U.S. and China extended their trade truce by solidifying additional details on the ‘phase one’ agreement outlined in October. This sidelined a planned increase in U.S. tariffs against Chinese imports.

In January, the two sides signed the agreement, putting an exclamation point on the assumptions markets had built into asset prices for months: A material escalation in the trade fight is off the table over the intermediate-term; and the U.S., as well as China, will not willingly erode global growth with more tariffs. As a result, global stocks continued their year-end rally into 2020.

Also, a landslide election victory by UK Conservatives in mid-December answered a central question that has loomed over Europe for the better part of three years: Will Britain finally exit the European Union? The decisive victory has led to an increasing likelihood Britain will exit the EU by the end of January and will begin the process of forging a new customs and trade relationship.

Although recent trade and Brexit developments provide a degree of near-term clarity, which has helped equity prices press to new all-time highs this month, we believe a degree of caution is warranted considering stretched equity valuations.

Growth remains slow around the world, particularly in the manufacturing sector. Though the services side of the economy continues to expand, manufacturing activity may need to improve to keep a cyclical recovery on track. That along with unfolding developments in the Middle East, a contentious U.S. presidential election, a bitterly divided Congress and elevated expectations for profit and economic growth in 2020 all argue for balance across portfolios today.

Remember, it’s where the year ends that counts

We believe the chart below demonstrates an important concept — stocks generally finish the year higher more times than they finish lower. However, in every measured period, there is a point during the year where stocks experienced a downdraft. In some occurrences, these downdrafts were significant and differed materially compared to where, in this case, the S&P 500 Index ultimately finished the year. In our view, investors should focus on diversifying their portfolios and avoid becoming emotional during potential bouts of market volatility this year.


Refer to the ‘quick hit’ summary table below for key takeaways that can help you start the new year on the right foot
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Our key takeaways for 2020: what you need to know
  1. Trade and politics could create periods of market volatility
  2. We see modest economic growth accompanied by modest asset price gains
  3. Favor U.S. assets
  4. Recognize international markets could outperform if growth and trade conditions improve
  5. Focus on companies with strong profits and cash flows --- dividends are a plus
  6. In fixed income, focus on high-quality debt and expect a ‘clip your coupon’ environment
  7. Understand your tolerance for loss
  8. Focus on your longer-term goals and objectives
  9. Set realistic return expectations
  10. Maintain a well-diversified portfolio


Source: American Enterprise Investment Services, Inc.

 

Data source: Morningstar Direct, as of Jan. 10, 2020