As 2020 approaches, the U.S. is experiencing the longest period of economic expansion ever recorded, but investors are apprehensive about trade, geopolitics and low growth, both at home and overseas. Meanwhile, significant technological and demographic shifts could portend a wave of changes for the global economy.
Strategists and analysts at Bank of America’s chief investment office are optimistic about the opportunities they see ahead. They recently addressed several big questions about what 2020 could bring for the markets and the economy.
1. What are some of the biggest opportunities for the markets in 2020 — and what should investors watch out for?
Chris Hyzy, chief investment officer at Merrill and Bank of America Private Bank, says 2020 will be a foundational year for a world that is in transition. He gives four reasons.
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One, current monetary policy should enable the economy and inflation to run faster than they have recently.
Two, even as U.S.-China trade negotiations grab the headlines, trade around the world is transitioning from globalized to localized, which will result in increased automation and technology use. This may bring higher initial costs, but should lead to increased productivity over the next business cycle. Two global supply chains will emerge, one dominated by the U.S., the other by China.
Three, innovation can be expected to increase across all sectors, especially when it comes to data speed and information storage, as well as the build-out and redevelopment of global infrastructure.
Four, in 2020, millennials will start entering their top earning years, when their discretionary spending shifts toward owning a home, creating a family and buying things they did not previously need. Over the next decade, this will lead to the creation of the next great equity culture, similar to that of the 1980s and 1990s.
Hyzy posits three potential scenarios for the markets in 2020:
- A “melt-up” scenario, which could significantly benefit riskier assets, like equities
- A balanced view that mixes growth optimism with election uncertainty over the summer
- A negative performance scenario where growth falters and geopolitical risks rise
“Our base case is the balanced view,” he says.
2. U.S. stocks have been on a sustained upward trend for more than a decade now. Can they continue moving higher? What sectors look most promising?
U.S. stocks can continue to advance, but expect the path forward to be choppy and the nature of the gains to be different, says Niladri Mukherjee, head of portfolio strategy in the chief investment office.
In 2019, earnings growth was essentially flat, so the strong market was due mainly to a big expansion in price-to-earnings ratios. Next year will bring the reverse, with price-to-earnings potential expansion largely flat or perhaps slightly higher, and earnings growth of about 8%, leading to a fair value level for the S&P 500 of about 3,300.
The Federal Reserve’s accommodative monetary policy was a major reason for last year’s advance, and should continue to serve as a tailwind for U.S. stocks. But two big unknowns could lead to volatility: how the U.S.-China trade relationship will play out, and uncertainty around the November U.S. presidential election.
Mukherjee and her colleagues remain optimistic about U.S. equities over international — albeit with increasing interest in international — and have a bias toward high quality and large-cap equities.
Although U.S. sectors currently offer little that is cheap, financial services stocks are trading at reasonable valuations and should be helped by a steepening yield curve and productivity enhancements. With consumer spending looking robust, consumer discretionary stocks should also do well. Select industrials, too, are also worth considering as the global manufacturing cycle stabilizes and improves.
3. Events in Washington feel like a fairly big risk factor this year. Has the market already taken that into account, or is it smart to hedge against potential market reactions?
It’s still early, and markets haven’t yet focused on November elections, according to Marci McGregor, senior investment strategist in the chief investment office. Typically, from August through November in an election year, both market volatility and policy uncertainty begin to rise; indeed, uncertainty is already elevated this time around with some big ideas on the table.
As the election draws nearer, financial markets show they really care about several things, including candidates’ positions on tax and trade policies and regulation. Historically, stocks have produced average returns around 11% in presidential election years, and the market has risen almost nine out of 10 times.
McGregor says it’s important for most investors whose time horizon isn’t the end of 2020 to look longer term at the market. Markets care most about growth; they care about what consumers are doing and about corporate earnings. Fundamentals are going to drive the market in the coming year. The rest is mostly noise.
4. What are the biggest geopolitical hotspots in 2020?
Uncertainty around the U.S.-China trade relationship is a big one, says Joseph Quinlan, head of chief investment office market strategy. As is the technology cold war emerging between the U.S. and China around which systems will be used and whether countries will be forced to choose one over the other.