The Mood Of The Markets

Unchartered Territory: Investment Insights for 2020

With late-stage economic expansion still in motion, investors and analysts eyeing 2020 as a pivotal year

RBC Wealth Management-U.S. (RBCWM) introduces its Global Insight Outlook report series, providing insight into U.S. equities, global fixed income and other key asset classes.

“‘Unchartered territory’ is an overused phrase, but we believe it applies to the current business cycle,” said Kelly Bogdanova, vice president and portfolio analyst at RBC Wealth Management-U.S. “While the global economy is in the later stage of current expansion, like the early-cycle and mid-cycle phases before it, this stage could prove to be longer than usual.

Developed economies are set to continue growing, but recession indicators are flashing caution and our Global Insight Outlook serves to help investors navigate the year ahead.”

U.S. Equities: Investors Should Not Be Complacent

“We have a constructive outlook for stocks for 2020,” Bogdanova said. “The economic expansion should have further to run, underpinned in our view by accommodative credit conditions everywhere, the robust good health of the American consumer, easing U.S.-China trade tensions, and the likelihood that most developed economies will deliver some fiscal stimulus. Corporate earnings will likely increase, as should dividends and stock buybacks, pushing share prices higher. All of this should transform the gloom of 2019 around trade and recession talk into a less fraught outlook for the economy. What it shouldn’t change is the investor’s commitment to vigilance.”

Reasons to be bullish:

  • The next recession still looks to be some way off. The economic expansion has further to run, in that monetary conditions remain extremely accommodative
  • The American consumer remains in robust, good health. Rising savings, housing prices comfortably back at their pre-financial crisis peaks, as well as a very constructive employment picture, have combined to produce elevated confidence readings and permitted the consumer to continue spending
  • So far, the market has displayed few signs of vulnerability. Earnings estimates are now more reasonable and look to be stabilizing. Valuations in North America are not outlandish, and in Europe and Japan, they remain cheap. Importantly, the breadth of readings across global markets confirm what underlying indexes are indicating
  • Disruptive change forces could completely upend the industrial marketplace within the next 5-10 years. Investors should increasingly focus beyond the next few quarters and into the years ahead. Today’s heavily discounted valuations in the Industrials sector make this an especially opportune time to seek out the groups and companies that are likely to establish competitive advantages in this transforming industrial world.

Reasons to be cautious:

  • Earlier in 2019, the yield curve inverted. Long-term yields fell because Japanese and European investors and savers were barreling into U.S. treasury bonds, rather than accept deepening negative yields in their home markets. But unlike past inversions, this one was not signaling a painful tightening of credit conditions in the U.S.
  • The shape of the yield curve is just one in a suite of six indicators RBCWM uses to gauge the probability of a U.S. recession arriving, and in aggregate, recession probabilities are increasing. Each is much closer to crossing its negative boundaries than one or two years ago.
  • Slow growth makes for a challenging investment environment. Valuations are full enough, at least in the North American markets, that they don’t leave much room to absorb either Gross Domestic Product (GDP) growth or earnings disappointments.

Global Fixed Income: A Challenging Environment Ahead

“Following a banner year for fixed income performance in 2019, 2020 is likely to deliver a far more challenging environment,” said Tom Garretson, fixed income portfolio strategist at RBC Wealth Management-U.S. “Our principal focus for global fixed income investors is to avoid letting low yields push them out of their comfort zone and making decisions that could put their portfolios and long-term investment objectives in jeopardy.”

The negative interest rate environment is modifying investor behavior as well as distorting the economic landscape. Low interest rates can push savers into taking larger investment risks in an effort to secure some sort of return...

A few key insights from the report, linked here, include:

After several years of a more normalized central bank environment, with some raising rates gradually, and others holding steady, 2019 saw global central banks shift back into easing mode-cutting interest rates or restarting asset purchase programs. The current economic cycle may be extended thanks to central banks’ actions, but it may also eventually become marginally more fragile as a result of these policies.

As a result, the ‘hunt for yield’ from earlier in the decade is back on. Central banks are still looking to support economic growth, perhaps providing a backstop for higher-risk assets, and the economy is likely toward the later stages of the current economic expansion as recession fears swell.

Low rates and quantitative easing were part of the solution to the debt problems of 2008. But the “fix” for the debt problems of the last decade has created a new set of challenges for savers.

The negative interest rate environment is modifying investor behavior as well as distorting the economic landscape. Low interest rates can push savers into taking larger investment risks in an effort to secure some sort of return. Households may also feel compelled to save more rather than less if they are to achieve their retirement objectives in a low-return world.
Looking across the global yield landscape, investors have rarely been paid less to take on more risks. The question is whether they measure that return to sufficiently match growing uncertainty in question.

Risks remain that may affect the credit landscape in 2020. Although recession risks are elevated, RBCWM’s expectation is that any downturn is likely to be shallow. We favor increasing quality in corporate bonds, but largely because the yield available in speculative grade corporates is exceedingly low relative to the risks.



About RBC Wealth Management – U.S.
In the United States, RBC Wealth Management operates as a division of RBC Capital Markets, LLC. Founded in 1909, RBC Capital Markets, LLC is a member of the New York Stock Exchange, the Financial Industry Regulatory Authority, the Securities Investor Protection Corporation, and other major securities exchanges. RBC Wealth Management has $384 billion in total client assets with more than 1,900 financial advisors operating in 170 locations in 42 states.
RBC Wealth Management, a division of RBC Capital Markets, LLC, Member NYSE/FINRA/SIPC.