No ‘Easy Layups’ in 2020: State Street
Investors shouldn't expect more of the same in 2020: Macro tensions could trim returns.
Investors will find a more difficult environment in 2020 — especially after such a fruitful 2019 in which a 60/40 mix of stocks and bonds brought in a 19.3% return, the best showing in a decade. As Matthew Bartolini, head of SPDR Americas Research for State Street Global Advisors, states in his outlook, there will be “no more easy layups” for investors in 2020, especially as 2019 was fueled by easy monetary policy actions.
Bartolini notes that “2019 was a very good year for almost everything. Stocks, bonds and commodities all produced positive returns, with some regions, sectors and industries posting sizable gains.” In fact, he adds, more than 75% of global stocks had positive returns while 97% of the bonds in the Bloomberg Barclays US Aggregate Bond Index had a gain. “Looking back,” he says, “finding a positive return in 2019 was a layup.”
However, he notes that as capital markets are “fluid beasts,” the calendar year measurement “obfuscates market trends that could be instructive for what is yet to come.”
The bad news is he doesn’t see the commitment of both fiscal and global monetary policy makers “to keep the good times rolling,” and investors should prepare. One factor: 2019’s strong returns have led to stretched valuations, and “historically, the higher the valuations, the lower the future expected returns,” he wrote.
“While we are not foreign to macro risk and political schadenfreude, over a short timeframe, a lot of stress will be put on the policy and politics system that markets will have to digest as either news or noise,” he says.
These macro events include:
- U.S.-China trade deal — which markets will have to determine whether it’s “a buy rumor/sell news event.”
- The Senate impeachment trial of President Donald Trump.
- More clarity in the Democratic primary process with conclusion of most the primaries.
- Federal Reserve’s January meeting that might clarify future plans for its “current liquidity assistance.”
- A Brexit decision on Jan. 31 “that could produce a deal or just be more of the same.”
Thus, the first 100 days of 2020 will have “no easy layups,” Bertolini writes, stating that “today’s risks seem more heavily skewed to the downside.”
He says investors should remember to: 1) stay invested but limit downside risks, 2) actively balance risk in the hunt for yield, and 3) position to temper the impact of macro volatility.
One point he makes is although broad-based annual U.S.-listed ETF fund flows were the second highest ever in 2019, “the strength in fixed income ETF flows masked the lackluster flow totals within equities. November and December 2019 showed strong flows in equities, he states, but full-year totals weren’t “anywhere close to a record or even to prior year levels.” In fact the $167 billion in flows in 2019 is 21% below 2018 levels and 49% below 2017’s record.
In addition, gold flows were driven also due to falling real rates as investors wanted to curb macro risks. He notes that “after having the second-most flows for a quarter ever (Q3 2019), the full-year numbers for gold ETF strategies came in as the second-most ever — behind the risk-off, panic-driven flows in 2009.”
With these cautions in mind, Bartolini states these are the three themes he is watching in 2020:
1) In terms of flows, active funds may beat passive funds again.
2) Sector flows could become more positive as the demand for alpha increases.
3) Fixed income flows have the potential to continue to average more than $10 billion a month and “assets could come close to $1.1 trillion by year end.”
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