For 2019, world financial markets performed exceptionally well, with double-digit returns in virtually all major asset classes, including domestic and international equities, domestic fixed income, and precious metals. The 2020 investment landscape should become increasingly favorable as the year unfolds. Economic, financial, and policy trends should support another year of positive returns, although annual returns are virtually assured of trailing those of 2019, and by a wide margin.
In this edition of Economic Commentary, Robert F. DeLucia, CFA and Consulting Economist for MEMBERS Capital Advisors, Inc., provides a financial market review and landscape outlook and an annual investment review for 2020. Here are the highlights:
- World equity markets performed well in the final quarter of last year, outperforming global bonds by a wide margin. Value stocks outperformed growth stocks for the first time in several years, while small-cap stocks outperformed large-cap stocks.
- The S&P 500 led all major asset classes in 2019 with a total return of 31.5%, propelled by a 50% return in the technology sector. International equities and US small-cap stocks lagged but each generated sizeable returns of 23.3% and 25.5%, respectively.
- The overarching investment theme of 2019 was a relentless fear of recession, resulting in an ongoing attempt by investors to safeguard portfolios against losses. Virtually all measures of investor sentiment remained depressed throughout the year.
- The US economy should perform better this year, as strength in consumer spending and housing is augmented by a moderate recovery by the manufacturing and capital goods sectors. Corporate earnings per share (EPS) could increase by 5% to 10%.
- The expected economic and policy environment in 2020 should be more favorable for equity versus fixed-income markets. Rather than decelerating as in 2019, world economic and profit growth should accelerate throughout the year. Global monetary and liquidity conditions will likely remain highly expansionary.
- Business profits are highly leveraged to industrial production, business capital investment, and trade, each of which was stagnant in 2019. A sustained recovery in these sectors will result in a disproportionately large increase in company earnings.
- Monetary conditions should remain highly accommodative throughout 2020. The Federal Reserve is determined to achieve faster growth and rising inflation, a bullish prescription for the equity market at the expense of fixed-income markets.
- Following a protracted period of underperformance, value stocks appear poised to generate superior returns relative to growth/momentum stocks. Receding market fears of recession should work to the advantage of value stocks.
- Corporate bonds offer little investment appeal at a current market yield of 2.8% but should slightly outperform the Treasury market. Historically narrow credit spreads are vulnerable to a rise in default rates later this year and in 2021.
- There is a strong case to be made that 2020 could be a watershed year for investors. The compound annual return of 13.5% on US large-cap equities over the past decade is unlikely to be duplicated anytime soon; indeed, a period of payback in the form of below-average returns in future years appears more likely.
All opinions and commentaries expressed are those of the writer, Robert F. DeLucia, and do not necessarily reflect the opinions of CUNA Mutual Group, CBSI, or its management.
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