Morgan Stanley
  • Wealth Management
  • Nov 18, 2019

2020 Outlook: Strategies for Your Portfolio

This late in the business cycle, investors should emphasize actively-managed funds and income-producing securities with reasonable valuations.

Lisa Shalett Chief Investment Officer, Wealth Management

It’s that time of year when investment strategists across Wall Street form their outlooks for the next year. I can say a few things with near certainty about 2020: There will be a U.S. Presidential election, an Olympics and a leap year. Beyond that, I have very little true visibility. 

The U.S. economy looks somewhat precarious. We are late in the economic cycle, corporate earnings are shrinking and manufacturing is weak. Yet stock markets are reaching new highs bolstered by accommodative monetary policy and hopes for a resolution of trade tensions. Will a strong consumer and healthy labor market be enough to keep stocks moving higher? I’m not convinced.

Consider the likelihood of potential drivers of more stock market upside. Will U.S. economic growth pick up? Morgan Stanley & Co. economists forecast just 1.8% GDP growth in 2020. That’s below the average of 2.2% this economic cycle. Could the Federal Reserve keep cutting rates? It has indicated it may sit on the sidelines in 2020. Could stock valuations continue to rise anyway?  At almost 19 times forward earnings, the S&P 500 is in the top quartile of richness for the past 40 years.

To me, material upside seems capped. Luckily, there are buffers to downside risk as well. Investors, both individuals and institutions, have a lot of cash on the sidelines which they are likely to deploy if there is a downdraft. That dynamic should allow markets to remain resilient going forward, even if there is an economic or policy setback.

Overall, my outlook is for 2020 to be an uninspiring year economically and markets to remain in a narrow range.

Longer term, I see lower than average gains ahead. In the past decade, the S&P 500 has returned roughly 14% a year and the U.S. Barclays Aggregate Bond Index has returned 9% a year—two or three times the normal amount for the last 100 years. Our Global Strategist Andrew Sheets estimates that in the next decade, U.S. stocks may return just roughly 5% a year and bonds a little over 2%.

Given that backdrop, I recommend investors emphasize broad diversification across asset classes and geographies and choose active fund managers who can navigate changing market conditions. For equities, I think it will be important to choose stocks with reasonable valuations that deliver some income, which can support valuations in a downturn.

For individual investors, our market outlook should be seen in the context of a long investment horizon that is underpinned by a comprehensive financial plan. Your financial plan should reflect the goals you are looking to achieve over time and a disciplined approach to asset allocation, saving and withdrawals. A Financial Advisor can help.

 

Risk Considerations

Yields are subject to change with economic conditions. Yield is only one factor that should be considered when making an investment decision. 

Equity securities may fluctuate in response to news on companies, industries, market conditions and general economic environment.

Bonds are subject to interest rate risk. When interest rates rise, bond prices fall; generally the longer a bond's maturity, the more sensitive it is to this risk. Bonds may also be subject to call risk, which is the risk that the issuer will redeem the debt at its option, fully or partially, before the scheduled maturity date. The market value of debt instruments may fluctuate, and proceeds from sales prior to maturity may be more or less than the amount originally invested or the maturity value due to changes in market conditions or changes in the credit quality of the issuer. Bonds are subject to the credit risk of the issuer. This is the risk that the issuer might be unable to make interest and/or principal payments on a timely basis. Bonds are also subject to reinvestment risk, which is the risk that principal and/or interest payments from a given investment may be reinvested at a lower interest rate.

Asset allocation and diversification do not assure a profit or protect against loss in declining financial markets.

Rebalancing does not protect against a loss in declining financial markets.  There may be a potential tax implication with a rebalancing strategy.  Investors should consult with their tax advisor before implementing such a strategy.

Because of their narrow focus, sector investments tend to be more volatile than investments that diversify across many sectors and companies.  Technology stocks may be especially volatile.

International investing entails greater risk, as well as greater potential rewards compared to U.S. investing. These risks include political and economic uncertainties of foreign countries as well as the risk of currency fluctuations. These risks are magnified in countries with emerging markets, since these countries may have relatively unstable governments and less established markets and economies.

Investing in foreign emerging markets entails greater risks than those normally associated with domestic markets, such as political, currency, economic and market risks.

Investing in commodities entails significant risks. Commodity prices may be affected by a variety of factors at any time, including but not limited to, (i) changes in supply and demand relationships, (ii) governmental programs and policies, (iii) national and international political and economic events, war and terrorist events, (iv) changes in interest and exchange rates, (v) trading activities in commodities and related contracts, (vi) pestilence, technological change and weather, and (vii) the price volatility of a commodity. In addition, the commodities markets are subject to temporary distortions or other disruptions due to various factors, including lack of liquidity, participation of speculators and government intervention.

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