2020 Outlook: A Marshmallow World

Dec. 29, 2019 11:39 AM ETS&P 500 Index (SP500)SPY, TLT, DIA, QQQ, IVV, VOO, HYG, JNK, LQD, BKLN, CWB, IEF, EDV, GLD, SLV, PHYS, PSLV, PHYS:CA, PSLV:CA13 Comments54 Likes
Eric Parnell, CFA profile picture
Eric Parnell, CFA


  • It’s a marshmallow world for capital markets as we enter 2020, as asset class gains were almost universal this year.
  • The outlook for stocks, bonds, and commodities in the coming year.
  • Tthe potential still exists for solid returns across a number of key and uncorrelated asset classes.
  • This idea was discussed in more depth with members of my private investing community, Global Macro Research. Get started today »

“It's a marshmallow world in the winterWhen the snow comes to cover the groundIt's time for play, it's a whipped cream dayI wait for it the whole year round”

--A Marshmallow World, Bing Crosby (Carl Sigman/Peter De Rose), 1950

It’s a marshmallow world for capital markets as we enter 2020. Name the asset class, and it had a stellar year in 2019. U.S. stocks? Up over +30%. Stocks across the rest of the world? Higher by more than +20%. Investment grade corporate bonds? Up nearly +20%. High yield bonds? +14%. Long-Term US Treasuries? +15%. Gold and silver? +16% each. Even long struggling commodities posted high single-digit returns this year. If you were allocated to risk assets in 2019, you likely enjoyed a good year.

Past performance can present future challenges. Most significantly, such universally good returns are difficult to maintain. Typically, capital markets assign winners and losers even when the stimulus is pumping full throttle as it is today. So whether such good times can continue in 2020 across all asset classes remains to be seen, but investors are well served to consider what categories may be best positioned to continue to climb and those that may be set to take a breather in the year ahead.


Stocks face a tougher climb in 2020. Unlike last year when the S&P 500 had dropped as much as -20% from peak to trough to close out 2018, stocks are surging by +10% in the final quarter of the year to close out 2019. As a result, another +30% year in 2020 is almost certainly not in the cards for stocks. Even +10% might be a push.

Stocks are facing a slowing corporate earnings problem in 2020. Quarterly GAAP earnings on the S&P 500 declined by more than -6% on a year-over-year basis in 2019 Q3. This marked the first quarterly year-over-year decline since 2015 Q4 and 2016 Q1 when oil prices were cascading to the downside and the U.S. economy appeared headed toward recession were it not for a major monetary policy intervention stick save. And while quarterly GAAP earnings for 2019 Q4 are currently projected to show a rebound in this regard, current forecasts are dubious in that the estimated +7% quarter-over-quarter earnings growth for the final quarter of 2019 stands in sharp contrast to the typical double-digit percentage decline in quarter-over-quarterly earnings that has taken place in Q4 every year over the past decade (2013 Q4 was the lone exception). Thus, corporate earnings growth is not only slowing, but it may be set up to disappoint in the coming quarters.

A corporate earnings recession should not be ruled out in 2020. A variety of economic indicators are heading in the wrong direction for corporate earnings in the coming year. These include industrial production, the ISM Manufacturing Purchasing Managers Index, business sales, and factory orders, all of which have turned negative on a year over year basis and are highly correlated with forward earnings growth. Moreover, other key readings such as the Leading Economic Indicators, real capital spending, non-defense capital goods orders, and ISM prices are all trending definitely lower on an annualized growth basis. Collectively, these indicators suggest that corporate earnings growth is at best likely to grind to a halt if not turn decidedly lower in 2020.

Stocks will likely be reliant on multiple expansion for further gains in 2020. Just because corporate earnings are falling does not mean that stocks cannot rise. But the fact that stocks are already trading at a post financial crisis high multiple of 24.3 times trailing 12-month GAAP earnings suggests that further gains on a valuation basis may be tough to come by. This will be particularly true if corporate earnings – the “E” in the P/E ratio – enter into a declining growth phase in the coming year.

Do not underestimate the “Trump Put”, however, in 2020. Despite the various apparent headwinds for stocks in the coming year, it is important to keep the following very important point in mind as we progress into 2020. Fiscal and monetary stimulus conditions are already abundant, which has an uncanny knack of making even the worst of stock markets behave like a screaming buy. And President Trump has demonstrated himself to view the performance of the stock market as a direct reflection on his administration. Given that we are heading into an election year, it should be assumed that the current administration will go to extensively great lengths to at minimum keep the stock market steady through much of the year ahead (past administrations on both sides of the political aisle have done the same over the years, so this is not something unique to the current President, perhaps only the intensity of focus this time around).

Bottom Line: Expect the S&P 500 to squeeze out a low to mid single-digit gain in 2020 assuming liquidity conditions remain sufficiently abundant to keep the stock market plugging along. Expect 2020 stock market returns to come with greater volatility and more violent swings along the way including the potential for a decent short-term correction early in the year.

Upside risk: A trade deal with China stokes economic optimism and results in economic growth and corporate earnings running ahead of expectations while inflationary pressures remains contained. Goldilocks returns once again.

Downside risk: The deterioration in key economic readings and corporate earnings begins to overwhelm the offset the fiscal and monetary stimulus. A la 2000 and 2007.


I have virtually no interest in owning riskier spread product in 2020. BBB-rated investment grade corporate bonds, high yield bonds, convertible bonds, bank loans – I want none of it. The accumulated recklessness of corporations for years taking on debt at low interest rates to repurchase shares coupled with years of widespread debt market shenanigans like “covenant lite” loans associated with companies that I would not trust to pay me Tuesday for a hamburger today under normal circumstances is all something that is going to end very badly some year soon. While it may not be 2020, I have no interest in being allocated when this day of reckoning finally arrives only for a handful of additional basis points in yield. It’s just not worth it in my view.

I remain bullish on long-term U.S. Treasuries. And I believe that 2020 may be a year where the iShares 20+ Year Treasury Bond (TLT) ends up outperforming the SPDR S&P 500 (SPY), perhaps by a solid margin. Why? For the following reasons.

First, inflation pressures remain in check. Inflation is by far the primary determinant of Treasury bond returns at any point in time. Not the budget deficit. Not the size of the national debt. Not how much more the government is going to borrow in the future. It’s inflation. And since the U.S. Federal Reserve has failed in eleven out of the past eleven years to bring reported inflation up to its modest 2% target and keep it there for any amount of time, I’m betting 2020 will make it twelve for twelve.

Second, the aforementioned deterioration in economic data and earnings. Despite the current enthusiasm, the U.S. economy remains filled with question marks about the sustainability of economic growth and corporate earnings growth. And any signs of economic and/or market uncertainty or weakness is Treasury bond bullish.

Third, the Fed has already shown its dovish hand. If the Fed couldn’t stick with a rate hiking program over the past year, they never will. Any hawkish credibility the Fed may have once had is now gone. They are full on dovish, keeping rates unchanged in the currently “stellar” economy and almost certain to resume cutting interest rates assertively at the first flap of a butterfly’s wing. It is likely only a matter of time before the U.S. Treasury market joins the rest of the world with its yield curve pinned to the zero bound. And with the 30-year yield currently at 2.32%, this implies attractive medium-term to long-term capital gains potential.

Lastly, the long-term Treasury market is consolidating. Treasuries had been advancing strongly since November 2018, but entered into a monster rally at the end of July when the Fed delivered its first quarter point rate cut in many years (when bond yields fall in the chart above, bond prices rise). Since the end of August, Treasuries have been giving back some of these gains, which is what healthy functioning markets do and is something that has been missing from the U.S. stock market on the most part for many years now. As a result, long-term Treasuries may actually be offering an attractive entry point at present for those that may be bullish and are interested in positioning for the next potential leg higher in Treasury prices.

Bottom Line: Long-term U.S. Treasuries may be set to turn in another solid year in 2020. Returns in the mid- to high single-digits are not an unreasonable possibility, particularly if the Fed remains supportive and underlying economic and corporate earnings growth trends continue into the New Year.

Upside risk: Key economic readings and corporate earnings deteriorate more markedly, renewing concerns about the threat for a recession.

Downside risk: Economic growth accelerates and sparks an increase in inflation expectations.


I have virtually no interest in owning most commodities in 2020. This includes industrial metals, agricultural commodities, oil, and natural gas. The global economy is increasingly awash in sovereign and corporate debt and growth prospects remain generally dim beyond the illusion fostered by once extraordinary but now ordinary fiscal and monetary stimulus. This includes China, which had been the biggest buyer of commodities but has curbed their appetite in recent years. I know many represent historically low relative prices and exhibit unusually stretched technical set ups, but the dependence on the supply/demand balance over the cash flow being generated still make these tough to consider owning in the coming year. This is particularly true given some of the economic uncertainties mentioned above.

I remain bullish on the precious metals complex. This includes allocations to both gold and silver. Why? Certainly not inflation expectations, but more than just pricing pressures can drive precious metals prices higher over time. For example, the unabashedly dovish U.S. Federal Reserve along with its global central bank cohorts continue to make an absolute debauchery of the still relatively new global fiat currency system at age 48 years and counting (for how much longer, I’m not necessarily sure). Such absolute dovishness is gold and silver bullish. Same with potentially building economic and corporate earnings weakness and uncertainty.

Gold and silver have been consolidating as of late. Much like U.S. Treasuries, gold and silver had been enjoying a strong run since late 2018 before exploding to the upside over the summer. Both precious metals have been consolidating gains since peaking in September, thus potentially opening up more attractive entry points for those that may believe another move higher may be coming in 2020.

Silver is particularly attractive relative to gold. Silver continues to trade at a bargain relative to gold based on their recent price relationship despite silver moving to catch up recently. It should be noted as shown in the chart above that silver is not suited for the risk averse investor, as price volatility is extreme. As a result, allocations to silver should be limited to 1% or 2% of a broad asset allocation strategy at most barring those investors with high conviction and extensive experience in owning it.

Bottom Line: Gold and silver both offer attractive returns potential and portfolio diversification characteristics heading into 2020, particularly given ongoing central bank stimulus and signs of weakening economic and corporate earnings data.

Upside risk: Key economic readings and corporate earnings deteriorate more markedly, renewing concerns about the threat for a recession.

Downside risk: Gold and silver get little love from government officials and regulators. These are not like stocks. If precious metals prices start dropping precipitously, don't expect central bankers to come running with support.

“Those are marshmallow clouds being friendly, In the arms of the evergreen trees, And the sun is red like a pumpkin head, It's shining so your nose won't freeze!”

--A Marshmallow World, Bing Crosby (Carl Sigman/Peter De Rose), 1950

Marshmallow world, revisited. It is setting up to be another solid year for capital markets in 2020. Gains across categories are not likely to be nearly as robust in 2020 as they were in 2019, but the potential still exists for solid single-digit return performance across a number of key and uncorrelated asset classes. This includes U.S. stocks, long-term Treasuries, and precious metals including gold and silver. But it should be noted that returns from any of these categories has the potential to come with higher price volatility, perhaps much higher, than we have seen over the past couple of years. And more broadly, the forces that are driving returns across some of these asset classes – namely stocks and related risk assets – continue to be distorting and potentially destabilizing long-term. But with an election approaching toward the end of 2020, it is likely that these negative forces will be held in check for much of the coming year.

Disclosure: This article is for information purposes only. There are risks involved with investing including loss of principal. Gerring Capital Partners and Global Macro Research makes no explicit or implicit guarantee with respect to performance or the outcome of any investment or projections made. There is no guarantee that the goals of the strategies discussed by Gerring Capital Partners and Global Macro Research will be met.

Try Global Macro Research and join our discussion about contrarian value opportunities in today's capital markets.

This article was written by

Eric Parnell, CFA profile picture
Assistant Professor of Business and Economics, Ursinus CollegeFounder and Director, Gerring Capital PartnersContrarian value investor across the broad array of asset classes - stocks, bonds, commodities, alternatives - with an emphasis on risk management and downside protection.

Disclosure: I am/we are long TLT, PHYS, PSLV, USMV, XMLV, XSLV. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I am also long selected individual stocks as part of broad asset allocation strategy.

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