Happy New Year! I hope your holidays were great! The investment team at Signature Wealth was busy working on your behalf, trying to close out a successful 2019. We did what we could to mitigate capital gains, but there were a lot of them, so you may see some higher numbers than you’re accustomed to when 1099s come out in February. It’s a success problem, though, as investment accounts generally performed well last year.
As for 2020, we won’t have the tailwind of recovery (remember the terrible 4th quarter of 2018 which set up the great returns in early 2019?), so stock market returns will likely have to rely on increasing earnings, rather than expanding p/e ratios, this year. Given that we are expecting corporate earnings to grow at 6%, I’m looking for stock market growth of about 6%, too. With dividends added, that might take the total return to somewhere near 8%.
Interestingly, in years that follow a 20% or better return for the S&P 500, the market has historically followed that up with another good year. Above average returns have occurred about 70% of the time in these cases, although it certainly doesn’t happen every year. It’s not a prediction, but it’s nice to know that history has been on our side going into 2020. (Source: Raymond James 2020 Equity Market Outlook, please contact me if you would like a full copy of the report).
Given that we expect an environment of low inflation, low interest rates, and improving manufacturing, the setup is a good one for stocks. So what are the areas of concern for stock prices? The yield curve did invert in 2019, which has historically been a good predictor of recessions. If inflation were to rise, that could cause the Federal Reserve to be less accommodating and to raise short-term rates, which could pressure stocks prices. Estimates for our economic growth, as measured by GDP, have been declining, and continued deterioration could cause some stock selling. Also, the S&P 500 currently sits at overbought levels, so any surprisingly bad news could cause a decent sized pullback or correction to more normally-priced levels.
As of early January, I’m optimistic that we’ll see higher stock prices, generally, in 2020. Given last year’s rally, and the very high levels of optimism among investors, I suspect we’ll see increased volatility, but I will likely use any pullbacks as an opportunity to add to stocks. Our favored sectors are technology, health care, financials, communication services, and industrials, but energy could be a real upside surprise. We’re avoiding consumer staples, utilities, and basic materials. Of course, a lot could change during the year, and I’ll adjust my opinion as needed.
In the meantime, now is a great time to re-evaluate your risk tolerance. Given the returns enjoyed by both stock and bond investors in 2019, I suggest reviewing your portfolio to make sure that a stock, mutual fund, or asset class has not gotten too overweighted. I hope 2020 is a great year for you!
As always, these opinions are mine, and may or may not be the same as those of Raymond James. This is not a solicitation to invest, although we do invite you to review your portfolio with us to see if any changes should be made. Past performance may not be indicative of future results. There is no assurance any of the trends mentioned will continue or forecasts will occur. Investing involves risk including the possible loss of capital. Asset allocation and diversification do not guarantee a profit nor protect against loss. The forgoing is not a recommendation to buy or sell any individual security or any combination of securities.
The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market. Individuals cannot invest directly in any index. Index performance does not include transaction costs or other fees, which will affect investment performance. Individual investor results will vary. Every investor’s situation is unique and you should consider your investment goals, risk tolerance and time horizon before making any investment. Sector investments are companies engaged in business related to a specific sector. They are subject to fierce competition and their products and services may be subject to rapid obsolescence. There are additional risks associated with investing in an individual sector, including limited diversification. The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete, it is not a statement of all available data necessary for making an investment decision, and it does not constitute a recommendation. Any opinions are those of Scott Mitchell and not necessarily those of Raymond James. Expressions of opinion are as of this date and are subject to change without notice. Raymond James does not provide tax or legal services. Please discuss these matters with the appropriate professional.