The new year kicked off with a continuation of last year’s bullishness, as investors see optimism around the world fueling risk assets’ move higher. Stocks globally rallied, particularly in China, as the central bank moved to reduce reserve requirements by banks, increasing current financial stimulus there. Adding to the momentum, jobless claims fell further this week, demonstrating the robust strength of the US labor market and companies’ reluctancy to let go of labor with such a shortage of skilled and experienced workers. Consumer confidence also clocked in at the highest level since June, with the comfort levels for those 65 and older, college educated, and homeowners all at the highest readings since 2000. Many point to the record stock market as a major contributor to the positive feelings starting off 2020, along with steady wage growth and a potential cease fire in the trade war.
After reviewing prognostications from hundreds of investment firms, predictions for this year seem to find consensus around the following themes: a slight growth pickup, manufacturing bottoming out, emerging market, high yield bonds and other risk assets outperforming, and the potential for volatility leading into the US presidential election. No one is confident enough to suggest a repeat of 2019’s stellar asset returns, though most expect solid upward momentum for stocks. We generally agree with this outlook, given the positive backdrop from the US economy, a reduction in trade frictions abroad, and a benign Federal Reserve that continues to add liquidity to the financial system. The overall easing of geopolitical issues in Europe and Asia further boost the case for investors to maintain their discipline and remain fully invested at this time. The US election in the latter half of the year will almost certainly see a pickup in equity and bond volatility, as potential tax policy, regulation, fiscal spending, and trade policy becomes clearer going forward. Even more importantly, earnings will be more crucial than in past years, as stocks are highly priced on a historical basis, and a failure to match corporate earnings with high current multiples could lead to a meaningful pullback in prices.
In the coming weeks, be on the lookout for trade confirmations as we move forward with some allocation updates to better position portfolios for the new year. We are continuing to refine the models with input from our investment partners to target asset classes we find particularly attractive such as technology stocks and global equities, while balancing the goal of maintaining proper risk mitigation strategies should an unexpected slowdown occur. As our outlook suggests, we believe that modest further gains are ahead for stocks and that fixed income returns will be more challenging to come by in the low rate world we find ourselves in. However, a well-constructed portfolio and disciplined investing should be able to navigate what is one of the longest bull markets in history. As always, we continue to remain extremely focused on monitoring unfolding market dynamics and reacting only when appropriate. Please feel free to call our office with any questions you may have.