Why stock and bond investors may want to pursue a chicken-bull strategy in 2020
By Jon C. Ogg, 24/7 Wall St.
As 2019 comes to an end and 2020 comes into focus, many analysts, strategists and economists are busy making forecasts for the next year. Some are even looking further out and are offering views about how the next decade may unfold. State Street probably knows a thing or two about the economy and the markets. The financial services giant dates back to before 1800, and it now has nearly $33 trillion in assets under custody and administration and another $2.95 trillion in assets under management. The company's assets are larger than most nations could ever claim.
With 2019 ending, State Street noted that the new century has so far been a tale of two decades -- economic recession and market volatility, followed by the biggest bull market of our lives. With U.S. major equity indexes at all-time highs, and with narrow credit spreads and low interest rates, the firm opines that this might all add up to a scenario of serenity ahead. On the other hand, State Street is warning that the margin for error, and opportunity, in 2020 "will likely be as small as it’s been in a very long time."
State Street's 2020 ETF Market Outlook is titled "Threading the Needle" and it offers strategies about how investors should position their portfolios. This involves growing market risks and insulating portfolios from potential broad market drawdowns. The first rule is to stay invested, but also to limit downside risks. The second reflection is to balance risk actively in the hunt for yield, and the third issue is to position portfolios to withstand macro volatility.
A week earlier, SSGA's 2020 outlook titled "The Only Way Out Is Through" noted that the global economic expansion should continue into 2020, led by the United States, with a potential boost from greater clarity in Europe.
As far as the fear of missing out on upside, SSGA's Michael Arone and Matthew Bartolini warn that blindly buying equities in 2020 could come with more risk than not having owned stocks in 2019. This is where investors are being told to consider strategies that limit the impact of volatility while pursuing equity returns. For generating sufficient income from bonds, this is where balancing duration and accounting for credit and geopolitical risks comes into play more than trying to chase the so-called double-digit returns. Against that macro volatility, having a low correlation to traditional markets may be beneficial in 2020. SSGA's forecast even said: "The historical low-correlation structure of gold to stocks and bonds has manifested itself in positive average returns during bouts of volatility."
The prior week's note did count on easing trade tensions in the year ahead. That report said:
We believe that the global economic recovery will continue in 2020, although it may have to sidestep substantial risks to sustain momentum. Those risks notwithstanding, renewed monetary policy support and resilience in consumer spending and services should help to propel the cycle forward. We expect world real gross domestic product (GDP) growth to improve modestly in 2020.
The team further noted:
Looking beyond 2019’s gratifying investment returns, it’s tough to understand why investors are so optimistic. Populist anger is rising across the globe. Economic growth and corporate profits peaked more than 18 months ago, even as financial assets continued to reach new heights. With three Federal Reserve rate cuts bolstering future expectations, investors aggressively bid up shares. Further dissecting stock returns suggests that multiple expansion — investors’ willingness to pay higher prices today for future growth — has driven all the returns.
SSGA also outlined certain strategies that were listed throughout its 2020 outlook. It recommends that investors target equities that may be affected less by volatility and to balance downside and upside with diversified multifactor strategies. The firm believes clients should add capital discipline with dividend growth strategies while minimizing risks with pure low-volatility strategies. Also worth noting was a call to balance between income generation, credit risk, equity risk and macro volatility with active strategies.
24/7 Wall St. has recently put together a 2020 forecast of all major Wall Street firms, but some are updating before year-end to reflect the new developments and expectations now that stocks have hit all-time highs again and recession risks look lower than just a few months ago.
