1. Keeping a Close Eye on the Economy
Adam forecasts that U.S. GDP growth will be moderate, at 1.7%, but expects the current economic expansion to continue unabated at least through the November presidential election, supported by a resilient labor market, robust consumer spending and a rebound in global growth. And after the election? He says the firm’s real-time economic indicators suggest a small probability of a recession over the next 12 months.
2. The Fed’s Corrective Surgery
The Federal Reserve’s three interest rates cuts have extended the U.S. economic expansion’s duration. Knowing that the effect of monetary policy lags, and given the Fed’s limited ammunition with the federal funds target rate at 1.50–1.75%, Adam does not anticipate that interest rates will be altered in 2020. The ongoing expansion of the Fed balance sheet will provide stealth easing as it delivers further liquidity, he says.
3. Tunnel Vision on the U.S. Presidential Election
Until Nov. 3, investors will have tunnel vision when it comes to U.S. politics. Congressional gridlock is the likely outcome, but uncertainty remains at the top of the ticket. The determination of the Democratic candidate may last into the summer, increasing the probability of the Democratic Party’s first “brokered convention” since 1952. History suggests that positive economic data favors the incumbent, but given divisions across the country, Adam says, the election may be determined by key swing states Pennsylvania and Wisconsin.
4. The Bond Market Viewed Through a Magnifying Glass
Global yields and spreads remain near record lows and continue to reduce the upside return for the bond market overall. Adam does not expect the 10-year Treasury yield to move significantly over the next 12 months (year-end target: 1.75%). Credit market spreads will widen a bit, but he does not think this will negate the positive performance of Raymond James’ favored sectors: investment-grade and emerging market bonds.
5. See the Bigger Picture for U.S. Equities
Following U.S. equities’ best year since 2013, the macroeconomic backdrop remains supportive with muted risk of a recession, easing financial conditions and lower interest rates. Last year, price-to-earnings expansion largely drove performance, but 2020 should renew the emphasis on earnings growth, which Adam forecasts at 5% to 6%. History will play a role as well. In presidential election years since 1936, the S&P 500 has rallied 9% on average and was positive 86% of the time. In the case of no recession (the Raymond James forecast), the trend is an average return of 10.7% and positive 94% of the time. The firm’s base case is that the S&P 500 will notch new highs and rally to around 3,350 by year-end.
6. Double Vision of Favorite Sectors
Raymond James still favors cyclicals over defensives: information technology, communication services, financials and industrials vs. a single defensive, health care, which lagged the broader market in 2019 because of political risk. Adam says this sector selection has the firm seeing double, as a bias toward these sectors is inherently beneficial to small-cap stocks. From both a market cap and revenue perspective, he notes that small-cap carries its highest exposures and weightings toward these same sectors.
7. Near and Far Sights for Tech Sector
Adam expects the technology sector to stand out again this year. His near sight is focused on earnings visibility, which remains robust with the anticipated rollout of 5G. The transition from 4G to 5G is the biggest enhancement in wireless technology in a decade, so his far sight makes him believe this will be a multi-year catalyst for everything from semiconductors to phone carriers and benefit other industries as well.
8. Blurred Vision for International Equities
Raymond James’ preference for U.S. equities over international ones has been a relatively easy choice in recent years, Adam says, but this year, the line between the two is beginning to blur. A possible bottoming in Europe’s economic data, attractive valuations on a relative basis, an acceleration in earnings growth and possible substantial fiscal stimulus packages (especially in Germany) may propel international equities moving forward. The firm maintains its view on emerging markets as an appealing allocation for long-term investors.
9. A Panoramic View of the Dollar and Oil
The U.S. dollar rallied six times in the last seven years, but a further broad-based rally is unlikely, Adam says. He says a stable, slightly weaker dollar is a positive for commodities and specifically oil prices, which he predicts will recover to six-year highs by the end of 2020 and rally to $65/barrel. (On Monday, oil prices topped $70/barrel in the wake of the assassination last week of Gen. Qassem Soleimani of Iran, according to The Financial Times.)
10. Volatility Is Hiding in Plain Sight
Last year was the best one for U.S. equities since 2013 and the best year for aggregate bonds since 2002, but investor complacency and elevated expectations are evident, according to Adam. However, with relatively more expensive markets compared with last year, volatility is hiding in plain sight. Headline risks abound in 2020, making it incumbent on the firm and investors and their advisors to decipher whether, and when, any of these headlines demonstrably alters their economic or asset class views.
Investors are looking for clarity and foresight as they are confronted with a daily dose of unprecedented headlines — from trade wars to impeachment, and from growth concerns to geopolitical tensions. Lawrence Adam, chief investment officer of the private client group at Raymond James, weighs in with 10 themes for 2020, the accumulated insights of the firm’s economists, strategists and portfolio managers. He notes that their guidance last January was spot on, with about 90% of their themes for 2019 proving accurate.
See the gallery for the views of Adam and his colleagues on the U.S. economy and major global asset classes in 2020.