by Robert F. DeLucia,
Summary and Major Conclusions:
- World financial markets are expected to behave differently this year when compared with 2019. Economic, financial, geopolitical, and policy conditions are also likely to differ from those of last year.
- Economic and profit growth should accelerate during the year. Inflation and borrowing costs are likely to move gradually higher, while the US dollar could decline.
- Despite an improving economic outlook, investment returns are almost certain to trail those of 2019, since most of the spectacular market gains of last year occurred in anticipation of improving economic conditions this year.
- The biggest surprise this year could be a better-than-expected rebound in foreign economies. World GDP growth could exceed 3%, up from 2.5% in 2019. Earnings growth for companies outside the US could exceed that of the domestic economy on a rate-of-change basis.
- Risk asset returns should exceed those of defensive assets for much of 2020 in an environment of improving prospects for economic growth worldwide and growing investor optimism.
- However, investment returns will likely be constrained this year because of elevated valuations in all asset classes.
- Monetary conditions should provide a continued tailwind for risk assets through most of the year. The Fed is determined to achieve faster growth and rising inflation, a bullish prescription for the equity market.
- US equity market returns exceeded 30% last year in the context of roughly zero growth in company earnings. Equity returns in 2020 are unlikely to exceed the growth rate in company earnings.
- World equity markets should outperform global fixed-income markets. Rather than decelerating as in 2019, world economic and profit growth should accelerate throughout the year, exerting upward pressure on interest rates.
- Common stocks almost always outperform bonds when economic growth is accelerating within a framework of stable inflation, accommodative monetary conditions, expansionary fiscal policy, and rising corporate earnings.
- Total returns on US equities in 2020 could be within a range of 5% to 10%. Within the context of modest returns on the overall equity market, significant divergences among sectors of the market are likely, with many distinct winners and losers.
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