For those regularly following the news, you will have likely seen many headlines about several financial firms expecting stock market gains in 2020. The Bank of America, for instance, has stated that it expects “higher U.S. yields and a softer dollar”, whilst Barclays has predicted “positive, if modest, returns in major asset classes”. Several market commentators point to 2019 as an (overall) strong year for global stocks and anticipate this upward trend to continue.
As Financial Planners, we have a careful balance to strike. On the one hand, we don’t want to over-exaggerate some of the risks posed to investment portfolios in 2020. On the other, we would caution against much of the over-optimism exhibited in the press. There are reasons to be positive, and reasons to include defensive assets in your portfolio.
2020: reasons to be sceptical
One should always be wary when it seems that all financial “experts” are converging around a prediction about what will happen in the stock markets. Remember, in the final quarter of 2018, the US and global stock markets missed their targets considerably, with almost £4.8tn wiped off the stock market. Following this steep decline, professional investors overwhelmingly predicted that 2019 would see performance continue downwards. As mentioned above, this turned out to be false. Most of the major indexes (e.g. the S&P 500 and FTSE 100) rose respectably, or even by as much as 27%.
At the moment, a large number of professional investors seem to be “riding on the high” of 2019, expecting strong growth from riskier investments such as US tech companies. However, there are good reasons to avoid impulsively piling all of your capital into stocks at this time, avoiding other asset classes. Including at least some level of protection (e.g. defensive, fixed-income assets) is important to help shield your portfolio in case 2020 does not transpire as these optimistic forecasters expect.
Here are just a few reasons to be sceptical about sky-high stock market gains in 2020:
- The US-China trade war, which is taking centre-stage to many macro forecasts. For the last 18 months, these two major powers have been imposing tariffs on each other’s goods, escalating from $34bn US tariffs in July 2018 to $200bn in May 2019. Despite the welcome news that a tentative “phase one” agreement has been reached, tariffs will stay in place for many goods for the time being and it remains to be seen how this will impact various industries (e.g. manufacturing) and the wider global economy in 2020.
- The UK’s withdrawal from the EU, currently scheduled for 31st January. The possibility of a “no-deal” Brexit still appears to be on the cards, with Prime Minister Boris Johnson insisting on not extending the time to agree on a new UK-EU trade deal beyond December 2020 (whilst the EU claims this is not enough time).
- Increasing tensions in the Middle East, which have the potential to dampen sentiment and potentially lead to higher Oil prices.
2020: reasons to be optimistic
It is not all bad news, however. In its assessment for market outlook in 2020, Deutsche Bank argues that periods of high stock market growth (e.g. 2019) are usually followed by modest growth, not steep falls. Whilst this does not guarantee, we will avoid stock market volatility or decline in 2020, it should help caution anyone against spiralling into panic.
Moreover, remember that almost half of the world’s global capitalisation emanates from the US, so investors should take some encouragement from the fact that America’s economy remains quite strong as we enter 2020. GDP is still growing (although more slowly than in some previous quarters), and fears of a US recession seem to have lowered at the time of writing.
(The US-China trade war remains a concern for investors. However, recently there do appear to be some signs of progress. In the latter part of 2019, China agreed with the US to roll back some of its tariffs, totalling as much as £280bn on its imports (e.g. electrical appliances).)
Another interesting development across the world is that many governments are now regarding monetary stimulus as decreasingly effective. The result? Political leaders are starting to turn their attention more towards fiscal expansion. Prime Minister Boris Johnson, for instance, was recently elected in December 2019 partly on a platform to increase public spending (e.g. £34bn more for the NHS per year by 2023-24). Although it is not guaranteed, higher public spending does tend to accompany higher inflation, which benefits shares over fixed-income assets such as bonds.
At this point, you might still feel like you have no certainty over what will happen to stock markets in 2020, and that’s the point. Nobody has a crystal ball on these matters, and so it’s vital to ensure your portfolio is well-constructed and prepared for different scenarios. Diversifying appropriately across different funds and asset classes will be key, as will following good investment practices such as investing for the long-term and avoiding impulsive decisions.
If you need to discuss your investment strategy or financial plan with an experienced member of our planning team at FAS, please give us a call.