Total time: 6:39
Komson Silapachai: Hi, this is Komson Silapachai, Vice President of Research and Portfolio Strategy at Sage.
Rob Williams: And this is Rob Williams, Director of Research at Sage. And today we're pleased to bring you our 2020 market outlook.
0:14
Komson Silapachai: So, for 2020, we've identified five key themes that underpin our outlook for that year. So, first is the U.S. consumer. The U.S. household sector remains the engine of the U.S. economy. Not only have they had the strongest balance sheets, really in the last 30 or 40 years, we're seeing expansion in labor markets continually. And so, the big question for us will be in 2020, does that continue? Does the labor market continue to grow? The second theme is the trade war. And so that's really over the last 24 months has been one of the main risks of the markets. In 2018, we saw tons of events in terms of escalations of the trade war. In 2019, there was more of a de-escalation event. Other than the blip in August, where we saw the market really take a hit in terms of negative equity prices and higher credit spreads, you’re really seeing President Trump and the Chinese leadership come to an agreement, which culminated in a ‘Phase One’ trade deal in mid-December of 2019. And so, we think that trade tensions will fade into the background and we won't see an escalation. The third theme is central bank accommodation. The big pivot in 2019 was a pivot from tightening Fed policy to an easier Fed policy, followed by all the other central banks globally. Will that continue? We're starting to see expansion in central bank balance sheets off a period of balance sheet shrinkage. And so, if that were to continue, which we think it will, it will be a tailwind for financial assets as well. The fourth theme is the presidential election. And so, this year we expect a lot of volatility in terms of asset prices, and more acutely will be the headlines. But we looked at data going back the past 90 years – going back 23 presidential elections, how did equities and fixed income do in those environments. We found that in 19 out of 23 election cycles, we had a positive year for equity markets, and that's a hit rate of about 83%. If you were invested in Treasuries, you would have earned a positive return 91% of the time. And so, we've seen a consistent positive environment for risk assets and fixed income. And so, we think that if the odds hold, we’ll have a positive year, albeit modest in equities and fixed income. And the last theme is corporate earnings. Last year, equities did really well, really underpinned by multiple expansion – not really earnings growth. This year, we need to see some earnings growth in global corporate earnings, and that will require not only stabilization and economic growth, but we also will require inflation to remain low so that input costs don't cut into margins for the global corporate sector. And so those are the five key themes – the U.S. consumer, the trade war, central bank accommodation, the presidential election, and corporate earnings. And I'll turn it over to Rob now to talk about our outlook and our positioning going into 2020.
3:24
Rob Williams: Okay, great. So those are our themes. If we roll everything together, what's our base case going into 2020? You know, we do feel like you're going to have stability in global growth. You have low inflation and you have policy support; you put those together and it does suggest upside for risk assets and higher-yielding fixed income, certainly for the first half of the year. So, we're very much attuned to that. But ultimately, we do recognize that you're in for some bumps and it will be lower returns than last year, by the time we get to the finish line here. And we do think it's going to get more difficult as the year progresses. And as I mentioned earlier, you know, there's a couple things that we think will constrain returns. One is that the sentiment has become very positive, which is a good thing and will drive markets early in the year, but it makes it more difficult for upside surprises. The market is lined up for recovery. So, further and further proof that the economy is stabilizing, that the global picture’s okay. It's just not going to impress the same way that it did in the earlier phase of this recovery. Two, monetary policy, also a big positive, very supportive. But what we think investors are going to grapple with as the year progresses is, has it reached its limit to ignite the economy again? We think the market and investors will start looking for fiscal support also, which may or may not come. And if it comes, it will come slowly. So, these are the things that we think investors will grapple with and could add some volatility. And the third thing is just the fact that we've had such a strong year. Valuations are much tighter in the credit markets, much more elevated in the equity market. We're coming into the year in a much more difficult position from valuations than we did last year. And we're unlikely, as Komson and I both talked about, multiples are unlikely to expand the way they did. And given our rate forecast of stable rates, you're unlikely to get that price benefit on fixed income, so that's going to be constraining factor. We do think there's returns to be had, we just think it's going to be important to stay tactical, not be afraid to take profits in winning positions, especially as the year rolls on, and that yield will be more important, dividend equities will be more important, and valuations will be more important.
5:42
Disclosures: Sage Advisory Services is a registered investment adviser that provides investment management services for a variety of institutions and high net worth individuals. This podcast is for informational purposes only and is not intended as investment advice or an offer or solicitation with respect to the purchase or sale of any security, strategy or investment product. Investors should make their own decisions on investment strategies based on their specific investment objectives and financial circumstances. All investments contain risk and may lose value. Past performance is not a guarantee of future results. For additional information on Sage and its investment management services, please view our web site at www.sageadvisory.com, or refer to our Form ADV, which is available upon request by calling 512.327.5530.
