Broker Check

WIA BELIEVES | Bumpy Road Ahead?

| January 13, 2020

Expectations - Good news may be already baked into the market and equities may be in for a bumpier ride in 2020

Six months ago, fears of a possible recession surfaced due to falling manufacturing levels, acute trade concerns and an inverted yield curve. Sentiment has improved markedly since then, and the second half of 2019 saw strong a strong come-back from the year-end 2018 lows for equities and other risk assets.

2020 has started in a risk-on mode with investors, despite a short-lived setback in stock prices and a spike in oil related to rising U.S./Iran tensions. Investors largely shrugged off rising tensions in the Middle East, evidence of a more mature investment cycle as investors seem increasingly confident. Investors don’t seem over-confident at this point, with neither a recession nor tighter monetary policy on the horizon, but we do think they may be looking past ongoing risks.

For most of the past decade, we have adopted a generally bullish stance toward the economy and equities. But today, we are less enthusiastic about the outlook for corporate earnings and profits growth and think markets may be short-term overbought, and hence, overvalued. Manufacturing and trade levels are improving, but this progress is marginal and these areas of the economy continue to represent a source of possible risk. We don’t expect much additional progress on the U.S./China trade front before the U.S. election, and business investment levels will likely remain muted as trade uncertainty continues.

As a result, we think stocks are likely to enter into a modest consolidation or correction phase in the near future, especially considering their strong rally over the past several months. Nonetheless, important factors like low bond yields, supportive central bank policy and improving economic growth are supporting equity prices. In the end, we think markets as a whole will likely generate only modest returns this year and near-term risks are elevated.

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