2020 Equity Outlook

“The Excellent Year of 2019 Followed by a Good Year”

January 23, 2020
David McInnis

In 2020, East Paces Group expects another solid year for global equities. There are many tailwinds to consider for 2020 because of global monetary easing in 2019 and the recent completion of Trump’s phase one deal  with  China. These events have created higher confidence, which should increase global companies’ willingness to replenish inventories. These events should filter through the economy in 2020. 

East Paces Group does not expect a recession in 2020. Now for a few clichés: “Bull markets don’t die of old age, they die of fright – and are most afraid of recession.” Prices do seem high after the impressive rally in stocks. Cue the next cliché, “Prices lead fundamentals.” If the saying holds true, we can expect fundamentals to strengthen in 2020. We believe low global yields, strong shareholder returns, and improving fundamentals are supportive of  an intra cycle economic recovery that support high Price to Earnings (P/E) valuation for equities. 

Looking ahead, we plan on decreasing our defensive sector exposures while tilting our allocations toward cyclical value and growth at  a  reasonable  price.  We will look to modestly increase our global exposure with the largest forecasted gains coming from emerging markets. However, if there is a significant correction such as 5% or 10% in the market in the near term, we can foresee  that  as  an opportunity to deploy cash into different equity vehicles. In addition, various outcomes of the upcoming 2020 Presidential Election could cause significant change in the financial world which would alter our approach.

Market Projections:

  • We believe a 12-month price target on the S&P 500 of 3,400 to 3,450 is attainable.  This represents a return of 6% to 8% including dividends.  We are using fundamentals, technical, election year statistics, and relative value measures that incorporate inflation, yields, PEs  etc. to estimate this price target.

  • Our current consensus has EPS growing by 7.5% in 2020. However, due to a phase one deal with China, we expect the estimates will be raised to reflect a possible 10% growth in earnings for the S&P 500. 

  • We believe the style rotation that began in August of 2019 to value stocks will continue in  2020, and we believe it is in its earlier stages based on historical trends. 

  • At the sector level, we are looking to position more in value cyclical oriented stocks with Energy,  Industrials,  Financials and Communications sectors as overweight.  Within the defensive, we would underweight Staples, Utilities and REITs. We do believe Value Oriented Growth and Tech will hold their own in  this market as we maintain market exposure to these areas. 

  • We still think global stocks have a way to go and represent large discounts to U.S. counterparts. Global stocks that are measured by the S&P Global Ex-US BMI  (Broad Market  Index)  are at a relative  P/E  that  is  one  standard deviation below its average of the last 15 years. This is below the mean trend that has persisted for the last several years. 

Economic Outlook: 

  • Global GDP growth to rise 3.3% in 2020.

  • U.S GDP growth consensus is ~2.0 for 2020, and we believe there may be material upside  to consensus

  • Core CPI is forecasted to see a slight down tick from 2.6% in 2019 to 2.3% in 2020

  • Fed Fund rates are expected to avg. 1.5% to 1.75%

  • Unemployment to hold at 3.5% to 3.7%

Sources: J.P. Morgan, Barron's, CFRA, S&P Global, NDR.com, Morningstar, Argus, WSJ, Bloomberg. 

Past performance does not guarantee or is indicative of future results.  This summary of statistics, price, and quotes has been obtained from sources believed to be reliable but is not necessarily complete and cannot be guaranteed.  All securities may lose value, may not be insured by any federal agency and are subject to availability and price changes.  Market risk is a consideration if sold prior to maturity. Information and opinions herein are for general informational use only and subject to change without notice.  This material does not constitute an offer to sell, solicitation of an offer to buy, recommendation to buy, or representation as the suitability or appropriateness of any security, financial product or instrument, unless explicitly stated as such.

 

Emily Johnson