Overall, we expect 2020 to please investors with an up to low double-digit total return. Nonetheless, it ain't going to be as easy as 2019 was.
We expect uncertainty, therefore volatility, to rise, making the road more bumpy and one that requires drivers to pay closer attention to the ever-changing road signs.
It's advisable to keep playing offense, but without playing proper-efficient defense, you are much more likely to lose the game. Sure, it's only one game/year, but so was 2008.
The Fortune Teller ("TFT") is a well-known Seeking Alpha contributor who has been involved in the capital markets for over three decades. TFT is the main "spinner" of Wheel of Fortune ("WoF"), a Marketplace service that was launched in March 2017 and known to be a one-stop shop covering all asset-classes, sectors, and industries.
TFT has most recently allowed his alter ego, The Macro Teller ("TMT"), to open a new service, called Macro Trading Factory ("MTF"), where one of the portfolios supervised by WoF, Funds Macro Portfolio ("FMP"), is being featured.
As we enter the 12th year of economic expansion, and following the first decade ever to finish without even a recession (!), there's one simple question everybody is asking:
Can the longest-ever bull market, without a 20% drawdown (on a closing basis), continues, especially in light of the high geopolitical tension as well as the upcoming US elections?
In this article, we will try to provide some color and substance related to this question, by answering a series of questions (prepared by SA). Through this Q&A session, something that TMT has done two weeks ago (albeit using a different set of questions), we share not only our market outlook and macro views, but also point out at a few areas of special interest/focus and name a few targeted-micro suggestions, out of the ~250 trading ideas that Wheel of Fortune subscribers get, on average, a year.
What do you expect to be the key driver of stock market performance over the course of 2020?
In one word: Fed. In two words: Monetary policy.
I mean, this is a chart worth more than a thousand words:
We've touched upon this topic many times before, and TMT, who's more into (writing about) market outlook and macro views, has actually just run (this week) a series of articles solely focusing on that subject, i.e. monetary policy being the single most important key driver by a wide margin:
- Out Of 12 Potential Key Drivers That May Support This Bull Stock Market, There's Only 1 You Can Truly Count On Right Now
- The Fed Is Your Best Friend And The Proof Is In The Balance Sheet Pudding
- The 'Don't Fight The Fed' Mantra Continues To Dominate Trading, But Earnings And Dividends Might Be The Icing On The (Monetary) Cake
In a nutshell, we believe that investors should look at (almost) nothing else but simply follow the actions taken by Jerome Powell. The Fed has proven itself not only to be the most trusted safeguard (as the above chart shows), coming for help whenever needed, but the most reliable and consistent driver,out of 12 different key drivers that we've examined.
In short, we see no reason for risky assets to lose the support that they've been benefiting from over the past circa 11 years.
This article is looking at 2020 as a whole, consequently forcing us to express views that suppose to last throughout the year. Truth is, we believe that 2020 won't be a straight line, and we actually divide it into three parts:
- First four-five months, until a possible "Sell in May and Go Away" might become relevant.
- The next five-six months, up to (and including) October, leading to the event of the year: US elections.
- The last two months of the year, that would not only be a post-elections outcome, but also get us closer to the traditional end-of-year rally.
Having said that, for the purpose of this article we will keep it simple. Overall, we expect another positive year for the markets. Not as good as 2019 was. Most probably with much more volatility (VXX) than 2019 has seen. Yet, positive when measured point to point, regardless of what might be happening in-between.
As we begin 2020, are you bullish or bearish on U.S. stocks/your preferred asset class?
From the previous question, you could've already figured out that we've entered 2020 with a bullish stance. Interestingly though, although we've entered 2019 with the exact same stance, it was for a completely different reason. While in 2019 those were very attractive valuations (following the selloff in Q4/2018) that pushed us all-in, in 2020 this is almost entirely due to the monetary policy, and to some extent, in spite of valuations.
Although we do hold more than a dozen bonds, for example this one issued by Alliance Resource Partners LP (ARLP), we find very little value in bonds (AGG, BND) right now, whether we're talking about high-grade/US Treasuries (LQD, BSV, TIP, VCSH, VCIT, SHV, SHY, IEF, TLT) or about high-yield/junk (HYG, JNK, AWF, BKLN, EMB) debts.
To put things into perspective, US junk bonds are now yielding, relative to the S&P 500's dividend yield, the least since 2014!
What sectors do we like then?
- Technology (QQQ, XLK, VGT, FDN, IYW) for the reasons mentioned above, in spite of it being completely off the charts.
- Energy (XLE, AMLP, VDE, EMLP, XOP), which is the most undervalued sector among the S&P 500.
- Healthcare (XLV, VHT, IBB, IHI, XBI), where we find the most solid (less risky) profile from a value for valuation, i.e. perhaps only average gains but with a relatively small downside.
- Precious Metals (GLD, PHYS, IAU, SLV, PSLV, PPLT, PALL) generally and gold miners (GDX, GDXJ) specifically. This is not only a good hedge against whatever unpleasant surprises we may bump into, but it also may benefit if inflation keeps raising its head, just as it has started to do over the past three months.
Which domestic/global issue is most likely to adversely affect U.S. markets in the coming year?
From a domestic perspective, that would be the upcoming elections, without a doubt. Although Elizabeth Warren - Wall Street's greatest fear - has lost a lot of steam in the Democratic Presidential Nomination race, at least according to the betting markets, this is a key event, not only for 2020 but for years to come.
On the global stage, I'd still go with the Us-China trade war/negotiations.
We expressed our views that the conflicts with Iran, while important, are very unlikely to escalate to a war. As such, we don't think that this has the "fuel" to become a meaningful issue, even if we might see missiles - literally or figuratively - flying above every now and then.
The trade war, on the other hand, is something we're much more skeptical about. True, a phase one agreement (if and when signed...) is good progress (which is already five times baked into valuations), but we simply don't see how the Chinese will ever be in position to reach the real deal - a full, comprehensive agreement - unless president Trump give up on things that he himself defines as crucial/red-line.
Goldman Sachs (GS) estimates that the current marginal negative effects on China's GDP growth will diminish thanks to a phase 1 trade deal. Nonetheless, we don't see them taking the required steps to make Donald Trump happy before the US elections arrive.
Due to its scale, magnitude, and ongoing nature, we continue to view this as the most explosive, and most important, development on the global stage.
How does the political climate affect the risks and opportunities for next year?
As we just said, tremendously. Without intending to make any political statement in here, it's clear (to anyone without a bias) that Wall Street loves Donald Trump. Anything else might be seen as good, but not as good.
Again, I wish to reemphasize that I'm neither a US person nor taking any political stance here. I'm only trying to reflect what I see, from the outside, as an investment-manager looking at the potential risk and reward (solely) related to the capital markets, out of the US elections. Making an assumption regarding the identity of he person sitting in the White House starting 2020 is a crucial part of risk management and the assessment of the correlation between stocks and politics.
Here's what the Financial Times wrote bout this very same topic this week (emphasis ours):
A year-end stock market rally and strong wage growth for low-income Americans have boosted public attitudes towards Donald Trump’s economic stewardship, with more than half of likely voters polled by the Financial Times and the Peter G Peterson Foundation saying they believe the president’s policies have helped the US economy.
Some 51 percent of Americans believe Mr. Trump’s policies have either “strongly” or “somewhat” helped the economy, the first time a majority of respondents signaled their support for the president’s economic agenda since the FT and the Peterson Foundation began surveying American voters’ attitudes in October.
What do you expect out of the yield curve in 2020, and what impact will that have on the equity market and the economy in general?
Admittedly, we find this question to be the toughest cookie of them all.
Since the Fed's monetary policy is mostly reacting to, rather leading, the market, we assign more value to what the market has to say than what Jerome Powell or Richard Clarida are saying.
- Fed Chairman calls this a "midcycle adjustment" to policy? The market treats it as a fully-fledged QE5 already.
- Repo-market interventions are "temporary" (few days), "extended" (few weeks) or run "till year end" (few months)? The Fed vice chairman already announced yesterday that they will last at "least through April."
- The Fed expects interest rates to remain steady throughout 2020? The market already is pricing in at least one rate cut this year, with a 55% probability...
Either way, it seems like whether we are going up or down, the change would be relatively small, say up to 50 bps up or down in Fed Funds, under quite extreme scenarios.
This suggests that yields are likely to remain low and spreads tight. Therefore, we expect the yield curve to remain flat, certainly not too much above the inversion point.
Having said that, we do like a few BDCs (BIZD, BDCS) that just like banks are lenders, but unlike banks are still operating in the more risky credit arena, lending money to low-rated borrowers, where they can still get decent deals, not only through reasonable spreads but also by (sometimes) taking - or have the right to take, under the loan term - stakes in the equity of the companies they lend money to.
In terms of asset allocation, how are you positioned as we begin the New Year?
As a matter of fact, we've just revealed the current asset allocations within our two model portfolios that are (only) part of what we offer on Wheel of Fortune.
Single Opportunities Portfolio ("SOP") is a managed portfolio, comprised of up to 50 single names/equities (macro-thinking, micro-oriented, long only).
This is a fast-pace, very active, portfolio, looking to hold equities with double-digit total return potential over the short run (no more than 12 months).
Suitable/perfect for those who like to actively manage their money/portfolio, shifting gears manually, driving at a high speed, and changing the winning horses along the race.
At the starting point for the new year, this portfolio holds 50 stocks, across all 11 S&P 500 sectors.
Funds Macro Portfolio ("FMP") is a managed portfolio comprised of up to 25 ETFS and CEFs (macro-oriented, long-short, predominantly long though).
This is a calm, more relaxed, portfolio, aiming at outperforming the SPY on a risk-adjusted basis.
Suitable/perfect for those with no time, knowledge, or desire to manage their money/portfolio in a very active-demanding manner.
At the starting point for the new year, this portfolio holds 17 ETFs and seven CEFs.
Here's our current positioning of the FMP:
What "surprise" do you see in the market that isn’t currently getting sufficient investor attention?
There are three possible main surprises that aren't priced at all:
2. Donald Trump, whether you like him or not, the man is moving the market, and as we've seen above - it certainly works in his - and your 401K's - favor.
The market assumes that Trump will be in office for another term, or (at least) doesn't think too much about it, as of yet. If the polls, once the Democrats elect their chosen presidential candidate, start showing that a shift of power is likely - we expect the market to react negatively.
3. Asia. This is the region that has the potential to see some familiar "bad boys" faces. And no, we don't refer to these guys that are coming soon with a new movie...
On the other hand, the "die together" might perfectly fit into this item.
China turning its back to the US, and perhaps to US Treasuries as well, Iran retaliates at a much greater scale than people expect (or have seen), North Korea fully resumes its nuclear tests, including verbal threats - any of these may lift uncertainty to an elevated level that the market certainly doesn't price in right now.
It's going to be interesting, that's for sure.
What role will the Fed play in the coming year?
I think this question already been answered fully, and therefore we will cut it short this time round.
We only wish to point out that 2019 was a record year, globally, with 67 central banks adopting a monetary easing policy, and only 17 choosing the opposite path.
No other year comes any close to the net number of 50 central banks that are currently easing.
Assuming that 2020 will continue to see such a high net number, why would stocks retreat meaningfully, unless a "black swan" pop up?
What issue is receiving too much investor attention and/or is already priced in?
There are three of those:
1. Phase 1. Nothing to "milk" out of this cow anymore.
In case you missed it, the US trade gap has shrank to "only" $43.1B in November, out of which the deficit with China came at a six-year low.
Overall, that's the smallest deficit since 2016, largely reflecting a steep drop in imports from China along with the US shift into becoming a net exporter of petroleum.
2. Recession. A year ago we admittedly were fearful of having one. Contrary to that, we now think that this ain't gonna happen in 2020.
Slower growth? Possibly. A recession? Unlikely.
3. The "Buffett Indicator." Indeed, the US equity total market cap to GDP has just hit a new all-time high. Nonetheless, this indicator spells trouble for so long that it's time to simply let go.
At some point a correction will happen, but not as a result of the ratio the "Buffett Indicator" is at.
We expect a decent 2020.
Not as good as 2019 (hard to be), but good enough to keep the music going. Nevertheless, we expect 2020 to be much tougher to cruise through than 2019 was, and we are unlikely to maintain the same (current) bullish stance throughout the entire year.
As most of you probably know, there's no such thing as an "average return" when it comes to the market.
Only in 10 out of the last 120 calendar years, that's a 8.33% probability. The annual return delivered by the Dow Jones Index (DIA) ended between 5% to 10% - the most representative range around the average calendar year total return of 7.4%.
This means that only once every 12 years the market falls into the "representative range" for the average total return. We believe that 2020 has a good chance to actually fit into this (top end of this) range.
When it comes to the S&P 500 this is slightly higher, so we believe that investors may even look for low double-digit returns in 2020.
Having said that, we are very minded of risk management. As such, we are not only maintaining a high long exposure to stocks, but also execute trades such as this one on Apple (AAPL) or that one one on Tesla (TSLA), that may seem weird/crazy to (way too) many, but are an integral part of our overall hedging strategy.
Even if you're a very skilled player, if you only play offense, you're very likely to end up losing the game.
Happy New Year, play nicely and keep safe!
Wheel of FORTUNE is a one-stop-shop, covering all asset-classes (common stocks, preferred shares, bonds, options, currencies, commodities, ETFs, and CEFs), across all sectors/industries, through single trading-ideas and model-managed portfolios.
The $998/year fee is available only until 1/13/2020, inclusive.
Take advantage of our best-ever value-for-money:
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Disclosure: I am/we are long GLD, PHYS, SLV, PSLV, PPLT, GDXJ, TWTR. 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.