Our thoughts for 2020
Two thousand and nineteen has overall produced strong returns for investors even though volatility increased in equity and bond markets over the year.
We are currently in one of the longest US bull market runs in history. The last notable bull run was from December 1987 through to July 1990. While the Bull run in the United States is longer than any other, the Federal Reserve and Government continue to remain focused and want to avoid a recession at all costs. They are taking action to ensure the current upswing continues. As demonstrated by the latest Interest rate cut.
The flip side to a bull market is a bear market where investors see negative returns, combined with weak market sentiment and a lack of confidence in markets generally.
Major setbacks in markets have historically occurred when there has either been a recession or extreme overvaluation in at least one asset class. For example, the dot.com bubble of the early 00’s happened due to an overvaluation of the Technology sector.
Another example was the financial crisis in 2008, which was caused by issues within the global banking system along with the property and debt markets being overvalued. This caused a severe market setback and a loss of confidence in the banking system.
Although there is a consensus that we are not heading into a bear market in 2020, there could be increased levels of volatility in the Equity and bond markets.
We anticipate that global growth will continue through 2020, albeit at a lower level than previous years. However, several factors such as the rise in populism, trade issues between the US and other major economies as well as limited progress on Brexit could increase the level of volatility on stock markets globally.
Many fund managers are concerned about the possible flatlining of growth through 2020. This could harm equities and especially bonds as they are perceived to be expensive in comparison to historical levels.
Although there has been a temporary pause in the US-China trade conflict, an increase in trade disputes not just with China, but also other developed economies could harm Equity and Bond markets in the short term.
Markets are reasonably priced when compared to 1996 PE multiples, but the earnings outlook globally for 2020 seem in some cases too optimistic.
Investors are likely to see positive returns in equity markets over 2020, however at lower levels. Black swan events that cannot be predicted could also increase the level of volatility in global stock markets throughout the year.
Investors that are taking a long-term approach to investing in a well-diversified portfolio of Stock, Bonds and cash that is matched to the risk tolerance will benefit long term.
Sometimes it is easy to focus on the short-term market predictions rather than long term investing fundamentals.
A long-term approach to investing is the recommended strategy for investors. Short term volatility should be seen as markets adjusting their value based on the latest economic information and market data.