The Year Ahead: Market Factors That Could Affect Your Portfolio In 2020

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Ringing in the new year signifies a fresh start for many. For the financial markets, though, hangovers from the previous year can color the outlook, as hitting the reset button on data, trends and issues — appealing though it may be — is not a viable option. As 2020 gets off the ground, investors can expect to continue finding comfort in favorable trends while dealing with frustration caused by persistent challenges.

Economic growth chugs ahead.

For the U.S., the longest economic expansion in history continues, albeit slowly. The Federal Reserve’s estimates for gross domestic product growth in 2020 is 2.0%, ticking down from the 2.2% predicted for 2019. Throughout the expansion, GDP growth has averaged 2.3%, so this modest decline alone does not appear to be cause for concern.

The labor market remains strong, with the unemployment reading in November at 3.5%, near historic lows. Consumer spending and consumer confidence are still high, though both have moderated from their elevated levels. Consumers have been buoyed not only by the strong labor market but also by solid wage gains and a stock market that is contributing to disposable income. Further, low interest rates have helped spur loan growth, which is evident in demand in areas like housing starts and new and existing home sales.

An area of weakness to watch in 2020 will be manufacturing. The Purchasing Managers’ Index, or PMI, regional survey data and business spending have grown softer throughout 2019, with the trade war weighing on the industry and investors. Some stabilization and even reversal of trends in this segment materialized in the past few months of the year; however, with little clarity of when and how a resolution will be reached with China, the overhang on investors’ psyches will likely impact spending and market performance.

Trade war lingers, but stocks carry on.

The U.S. trade war with China has jockeyed for headlines since firing up in the summer. It has impacted the manufacturing sector and has weighed on consumers in terms of uncertainty about the direction of pricing and impacts on spending power. Corporate earnings have also been impacted, as evidenced by a decline in 2019 earnings estimates, but the stock market has remained largely immune. On occasion, the market has reversed on increased rhetoric, but associated downward movement has been short-lived and sporadic.

As the trade war bleeds into 2020, once-subdued market volatility should become more pronounced and dramatic with the potential to limit upside returns. Although investors are hoping for resolution, the negotiation process is complicated, and both sides are firmly committed to their perspectives and coming out on top.

Federal Reserve, central banks step in.

The potential negative impact of the trade war on U.S. and global growth prompted the Federal Reserve to adopt a dovish stance in 2019, lowering the federal funds rate three times in the latter half of the year to encourage borrowing and investment. The Fed continues to monitor prospects, and one more rate cut in early 2020 is not out of the question.

Central banks in Europe have also taken an easing stance, seeking to thwart recessions in their respective economies as data points to economic slowdowns. Across the continent, manufacturing PMIs have been in contraction territory and deteriorating, exerting a drag on the service sector. Interest rates in Europe are lower than in the U.S., yet central banks are cutting to the point, in some cases, of entering negative territory in which the cost to borrow is essentially free. Policies may be having an effect, as some data is showing signs of stabilization and even exceeding low expectations.

Opportunities appear in stock and bond markets.

Although disappointing data may be coming out of Europe, the market does offer lower price-to-earnings ratios when compared to those in the U.S. Investors with an interest in diversifying with international stocks in 2020 might consider evaluating opportunities to increase allocations strategically in this region.

In the U.S., equities are more expensive than their long-term averages, but supported, in part, by lower interest rates and tame inflation. Stocks appear to be valued fairly and are pricing in a trade war resolution and a continued dovish stance by the Fed, so the risk is they could come under pressure if either of these expectations is hindered. Corporate earnings growth forecasts for 2020 appear high at about 9% for the S&P 500, and they will likely be revised lower.

In the bond market, higher yields in the U.S. relative to those in other nations helped drive investor demand for long-term yields, driving prices higher and yields lower on these issues. Going forward, the bond market should stay fairly range bound as concerns, such as growth and the trade war, are counterbalanced by positive trends, such as the persistently solid consumer.

Politics could make for an exciting ride.

An election year is invariably filled with twists and turns as well as charged rhetoric, and the financial markets will be tuning in to developments as the Democratic field narrows and the Republican standard-bearer seeks reelection. Proposed fiscal and trade policies will no doubt generate significant discussion, but in the long run, investors who tune out the noise and focus on pursuing their individual goals can avoid making abrupt, emotional decisions that could derail a financial plan.

One thing is certain: What’s old is new again. While some experts expect volatility to pick up in 2020, being diversified with a long-term plan is the best hedge against uncertainty and unease. A financial professional can help investors steer clear of illusions and ensure a financial plan, its objectives and individual life circumstances are in alignment, ultimately helping chart a clear path for the future.

The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.

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