Weekly View - A year to remember
An exceptionally prosperous year for investors in risk assets was capped last week by the semblance of a ‘Santa Claus rally’ that pushed US stocks to record highs. Along with continued optimism about an interim US-China trade deal, there was plenty of fuel for stocks’ advance—for example, news of a strong US holiday shopping season and initial jobless claims showing the US jobs market remains robust. The question of course is, will the good times last? Since we see weakening of the US economy to become more apparent in the second half of 2020, we are sticking to our long-held neutral stance on US Treasuries. It might even make sense for bond investors to add some duration if and when 10-year Treasury yields move beyond 2%. But while valuations are high and while it is hard to see a repeat of 2019’s performance, we are not unduly pessimistic about equities. We may not see the kind of multiple expansion that drove total returns for the S&P 500 to over 30% in 2019, but positive returns can still be expected, driven by dividends, continued share buybacks and earnings-per-share growth (likely in the low single-digits). While rising, relatively low bond yields should also continue to provide support to equities.
We do anticipate a rise in volatility from low levels. After the scare in September, this week could see renewed ructions on the repo market, for example. And outside overnight markets, we need to remain on guard for the unexpected, such as the brief ‘currency war’ that broke out between China and the US, which made markets shudder during August. Together with the risk of renewed trade tensions, the decreasing ineffectiveness of central bank easing (plus the growing resistance to negative interest rates) will make the year ahead tricky to manoeuvre—with Brexit and the US elections adding extra spice to the mix. But as long as politicians, policy makers and investors alike hold their nerves, there is no reason to abandon optimism. While it would be well to build up tactical and strategic protection in portfolios, it is not yet time to reduce risk significantly in portfolios. There are still opportunities out there for active investors. With this in mind, we would like to wish our readers a happy and prosperous new year and decade!