The next decade will not look like the last one; nor will the next year likely look like the last year.
Economic bifurcation is expected to persist to start 2020; with trade/political uncertainty plaguing business confidence and manufacturing; but labor conditions continuing to support consumers and services.
Fed policy should continue to support stocks; but stretched valuations suggest earnings will need to step up and do more of the market’s heavy lifting.
As we are about to turn the page on another decade, I was reminded of a quote from Mother Teresa that is etched on a plaque in my daughter’s room. She, too, is about to leave the teen years behind next month.
“You will teach them to fly, but they will not fly your flight. You will teach them to dream, but they will not dream your dream. You will teach them to live, but they will not live your life. Nevertheless, in every flight, in every life, in every dream, the print of the way you taught them will remain.”
The next decade will likely not look like this past decade; but there are lessons for investors that should resonate throughout time. Given that nearly every market across the spectrum of equities and fixed income had above-average returns over the past decade, it is likely a feat which won’t be repeated in the next decade.
But for now, let’s focus on the next year. In the summary outlook we released last week, the theme was “What may tip the scale?” It highlighted the competing positive and negative forces that will continue to work both for and against the U.S. and global economies and markets. My section was of course on the U.S. economy and stock market. Its key points:
- The U.S. economy likely will remain bifurcated—at least to start the year—with beleaguered manufacturing and business investment, but healthier services and consumer spending.
- Easy monetary policy should carry over to 2020; but it isn’t the elixir to ongoing trade and political uncertainty.
- The recently announced “Phase One” trade deal between the United States and China could help stabilize manufacturing/business investment; but corporate animal spirits are unlikely to be meaningfully revived.
The net as we enter 2020 is that we remain tactically neutral on U.S. equities—which means we continue to recommend investors stay at their long-term strategic allocation to equities, while using volatility to rebalance back to those long-term targets. Within U.S. equities, we remain biased toward large cap stocks at the expense of small cap stocks given the latter’s weaker profitability path and higher debt ratios; although small caps’ valuation discount should continue to provide some relative support. But let’s shift to the macro to start.