Expect Major Stock Market Challenges In 2020

Jan. 01, 2020 5:41 AM ETAAPL, AMZN, BRK.B, GOOG, GS, MSFT, QQQ, SPY, VOO, GOOGL, BRK.A98 Comments


  • The stock market has completely rebounded from last year's sell-off and again reached new highs.
  • The entire gain is based on valuation expansion, not earnings growth, leaving earnings yield at a post-2008 low.
  • The Fed just pointed out that the trade war has cost more than it made and the new trade deal isn't that big a deal.
  • Money flow into the stock market is peaking as a new wave of pension selling and Boomer RMDs are set to hit.
  • Corporate share buybacks have been the marginal buyer of stocks and are poised to slowdown in 2020.
  • This idea was discussed in more depth with members of my private investing community, Margin of Safety Investing. Get started today »


In my 2020 Outlook, I covered the two scenarios most likely to play out in the coming year. The short of it is that I see 2020 being either like 2015 or 2018.

2015 was a choppy year that produced no gains:

SPY 2015

2018 started rough, rallied and ended rougher:

SPY 2018

Of course, we could always get "to the moon." If you are more concerned with chasing returns than managing risk, you can position yourself for that scenario.

I recommend building a margin of safety by selling your assets with the most risk in a correlated correction and raising cash to be deployed at lower valuations in the assets we believe will perform best in the 2020s.

Stock Market Valuations Are Very High

Various measures of stock valuation can be employed by equity investors. I prefer the measure that Peter Lynch used, which was PEG, or Price/Earnings divided by Growth.


Source: Yardeni

As you see, the PEG ratio for the S&P 500 (SPY, VOO) is historically high. The forward P/E ratio is also approaching significant overvaluation. Either growth needs to pick up or prices need to come down a bit to bring these valuations closer to normal.

Brian Gilmartin of Trinity Asset Management points out that "Earnings Yield" is at its lowest point in the post-financial crisis era. He does point out that the forward estimates are about to become current year. That means we need to keep a close eye on what corporate chieftains say at earnings in a few weeks about their outlook. What if earnings don't meet expectations this year?

Multiple other valuation measures are also testing levels only seen a few other times in the past century:


The Q ratio is Warren Buffett's favorite indicator. It is the market cap of all publicly traded companies to the U.S. GDP. Its extreme

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This article was written by

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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 own a Registered Investment Advisor, but publish separately from that entity for self-directed investors. See relevant terms and disclaimers at the website of Bluemound Asset Management, LLC. Any information, opinions, research or thoughts presented are not specific advice as I do not have full knowledge of your circumstances. All investors ought to take special care to consider risk, as all investments carry the potential for loss. Consulting an investment advisor might be in your best interest before proceeding on any trade or investment.

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