Despite trade concerns and cooling economic growth weighing over the market throughout 2019, it has been a strong year for equities. On the back of this strength, it draws curtains to what has been the best performing decade for the S&P 500 index since the 1950s.
With policy makers taking an active approach to manage remaining macroeconomic risks, 2020 looks well positioned for the bull market to enter its 12th year. Our expectations point to a 15% rise in the US stock market next year on the back of a slowly improving global economy and renewed strength in the tech sector.
A brighter global economic outlook
In the last twelve months, 20 central banks have eased monetary policy. As such, we anticipate a rise in global economic activity during 2020 that is likely to help the US stave off the threat of a recession.
Much of this growth is likely to be driven by emerging economies. The interim trade deal struck between China and the US paves the way for a boost in confidence and investment in China that may spur economic growth. Elsewhere, India’s GDP growth is expected to continue surging at a strong rate, while Brazil’s economy is showing signs of a rebound. Meanwhile, developed regions like Europe and Japan are targeting negative interest rates to stimulate growth.
On the back of this improving landscape, the US could benefit from an uptick in confidence levels. Unemployment should remain at record lows and the acceleration in wages during the second half of this year could continue into 2020. This may help underpin the growing momentum seen in consumer sentiment and spending levels, a potential catalyst for US GDP growth.
Another potential tailwind for the US economy is an improvement in manufacturing and agriculture. Notwithstanding the risk that the trade war re-escalates, business investment should start to improve following the interim trade deal. In addition, commercial and industrial data is pointing to a rebound in early 2020 after a lull during spring and summer.
Should these measures fail to stimulate growth, the Federal Reserve still has the option to lower interest rates. However, the Fed’s outlook for steady policy next year speaks confidently about the prospect of an improving economic outlook.
Identifying potential opportunities
Following on from an impressive run during 2019, the technology sector could provide significant opportunities in 2020. We expect there will be substantial growth from this sector that ultimately drives the stock market higher, as has been the case for several years now.
Specific opportunities that we anticipate have the potential to outperform include stocks in the areas of cloud-computing and dynamic software, consumer technology, and semiconductors. Each of these areas are leveraged to growing consumer confidence.
Another segment representing opportunity is likely to be big-box retailers from the consumer staples sector. While we foresee a gradual improvement in the economy, these sort of stocks are well-positioned to continue bringing in cash even if the economy does slow down.
The health care sector has been out of favour for large periods of this year and may come under pressure in 2020 courtesy of election-related risks. Both sides of the political spectrum are likely to campaign for lower pharmaceutical drug prices. However, the Medicare for All plan is a potential headwind that may weigh on sentiment in this sector for most of the year, even though President Trump looks likely to survive impeachment proceedings and go on to be re-elected.
Nonetheless, there is still likely to be individual stocks in the health care sector that appear ‘attractive’ from a valuation perspective. A lot of the negative sentiment has been factored into the price of certain companies already. The underlying thematic remains compelling as far as an aging population and growing affluence spurring demand for health services.
Financial services stocks may also provide an opportunity on account of similar political risks. If the Democrats were to win office, this sector may come under renewed selling pressure. However, in anticipation of a Republican election victory, the sector’s earnings valuation is attractive relative to some of the other sectors on the market.
Companies in the financials sector are trading at 13.3x their 2020 earnings forecasts, whereas the S&P 500 is trading at 17.6x. Renewed business confidence and an uptick in the economy should support earnings and valuation growth in this sector.
Sustained growth in the market
Buoyed an improving global economy, subsiding trade anxiety and accommodative central bank policy, we expect market sentiment to be strong throughout 2020. While some risks remain in play, policy makers are actively looking to mitigate these headwinds, which has the potential to reduce volatility.
Providing policy makers act with appropriate discretion, it is also possible that we could witness a higher level of stock buybacks among companies next year. This would be a positive catalyst for earnings growth and valuations, while at the same time, low interest rates are likely to encourage yield investors into the market in search of income opportunities.
In 2020 we will be looking for a 15% return in the market, with a particular focus on the evolving growth coming out of the tech sector. This sector has remained resilient during the economic slowdown, and should now be poised to accelerate as the global economic outlook improves.