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Market Update: 2020 investment outlook

Anthony Saglimbene, Ameriprise Global Market Strategist

As of January 10, 2020

Looking back

  • The S&P 500® Index is coming off its best year since 2013.
  • Washington and Beijing finally signed a ‘phase one’ trade agreement.
  • The market largely ignored the recent flare in U.S. and Iran tensions. 
     

Up ahead

  • The Senate could soon begin the impeachment trial of President Trump.
  • Stocks and bonds could see positive but modest gains in 2020.
  • We expect a dynamic market environment, including periods during which stock prices could experience downside pressures.    
     

Data Source: FactSet

The bull keeps charging

The past year proved surprisingly strong for U.S. stocks and certain bond types. The S&P 500® Index returned more than +31% on a total return basis. Meanwhile, investment-grade and high yield bonds each returned more than +14% in 2019, one of their best performances of the decade.

In the final weeks of 2019, the U.S. and China extended their trade truce by solidifying additional details on the ‘phase one’ agreement outlined in October. This sidelined a planned increase in U.S. tariffs against Chinese imports.

In January, the two sides signed the agreement, putting an exclamation point on the assumptions markets had built into asset prices for months: A material escalation in the trade fight is off the table over the intermediate-term; and the U.S., as well as China, will not willingly erode global growth with more tariffs. As a result, global stocks continued their year-end rally into 2020.

Also, a landslide election victory by UK Conservatives in mid-December answered a central question that has loomed over Europe for the better part of three years: Will Britain finally exit the European Union? The decisive victory has led to an increasing likelihood Britain will exit the EU by the end of January and will begin the process of forging a new customs and trade relationship.

Although recent trade and Brexit developments provide a degree of near-term clarity, which has helped equity prices press to new all-time highs this month, we believe a degree of caution is warranted considering stretched equity valuations.

Growth remains slow around the world, particularly in the manufacturing sector. Though the services side of the economy continues to expand, manufacturing activity may need to improve to keep a cyclical recovery on track. That along with unfolding developments in the Middle East, a contentious U.S. presidential election, a bitterly divided Congress and elevated expectations for profit and economic growth in 2020 all argue for balance across portfolios today.

Remember, it’s where the year ends that counts

We believe the chart below demonstrates an important concept — stocks generally finish the year higher more times than they finish lower. However, in every measured period there is a point during the year where stocks experienced a downdraft. In some occurrences, these downdrafts were significant and differed materially compared to where, in this case, the S&P 500 Index ultimately finished the year. In our view, investors should focus on diversifying their portfolios and avoid becoming emotional during potential bouts of market volatility this year.

Our key takeaways for 2020: what do you need to know

  • Trade and politics could create periods of market volatility

  • We see modest economic growth accompanied by modest asset price gains

  • Favor U.S. assets

  • Recognize international markets could outperform if growth and trade conditions improve

  • Focus on companies with strong profits and cash flows --- dividends are a plus

  • In fixed income, focus on high-quality debt and expect a ‘clip your coupon’ environment

  • Understand your tolerance for loss

  • Focus on your longer-term goals and objectives

  • Set realistic return expectations

  • Maintain a well-diversified portfolio

Source: American Enterprise Investment Services, Inc.

Indices

The numbers

 

Data source: Morningstar Direct as of Jan.10, 2020

S&P sector returns YTD



Standard & Poor’s (S&P) 500 Index
The S&P 500 is a basket of 500 stocks that are considered to be widely held. The S&P 500 index is weighted by market value (shares outstanding times share price), and its performance is thought to be representative of the stock market as a whole. The S&P 500 index was created in 1957 although it has been extrapolated backward to several decades earlier for performance comparison purposes. This index provides a broad snapshot of the overall U.S. equity market. Over 70% of all U.S. equity value is tracked by the S&P 500. Inclusion in the index is determined by Standard & Poor’s and is based upon their market size, liquidity, and sector.

Dow Jones Industrial Average 
The Dow Jones Industrial Average (The Dow), is a price-weighted measure of 30 U.S. blue-chip companies. The index covers all industries except transportation and utilities.

Russell 2000 Index
The Russell 2000 Index measures the performance of the small-cap segment of the U.S. equity universe. The Russell 2000 is constructed to provide a comprehensive and unbiased small-cap barometer and is completely reconstituted annually to ensure larger stocks do not distort the performance and characteristics of the true small-cap opportunity set. The Russell 2000 includes the smallest 2000 securities in the Russell 3000.

MSCI EAFE Index
The MSCI EAFE Index (Europe, Australasia, Far East) is a free float-adjusted market capitalization index that is designed to measure the equity market performance of developed markets, excluding the US & Canada. The MSCI EAFE Index consists of the following 21 developed market country indexes: Australia, Austria, Belgium, Denmark, Finland, France, Germany, Hong Kong, Ireland, Israel, Italy, Japan, the Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland, and the United Kingdom. As of June 2, 2014.

 MSCI Europe Ex UK
The MSCI Europe ex UK Index captures large and mid cap representation across 14 Developed Markets (DM) countries in Europe. With 337 constituents, the index covers approximately 85% of the free float-adjusted market capitalization across European Developed Markets excluding the UK.

MSCI United Kingdom
The MSCI United Kingdom Index is designed to measure the performance of the large and mid-cap segments of the UK market. With 109 constituents, the index covers approximately 85% of the free float-adjusted market capitalization in the UK.

MSCI Emerging Markets Index
The MSCI Emerging Markets Index is a free float-adjusted market capitalization index that is designed to measure the equity market performance of emerging markets. The MSCI Emerging Markets Index consists of the following 23 emerging market country indexes: Brazil, Chile, China, Colombia, Czech Republic, Egypt, Greece, Hungary, India, Indonesia, Korea, Malaysia, Mexico, Peru, Philippines, Poland, Qatar, Russia, South Africa, Taiwan, Thailand, Turkey and United Arab Emirates. As of June 2, 2014.

Bloomberg Barclays US Aggregate Bond Index (Abbreviated as Bloomberg US Agg in table)
The Bloomberg Barclays US Aggregate Bond Index is a broad-based flagship benchmark that measures the investment grade, US dollar-denominated, fixed-rate taxable bond market. The index includes Treasuries, government-related and corporate securities, MBS (agency fixed-rate and hybrid ARM pass-throughs), ABS and CMBS (agency and non-agency).

Bloomberg Commodity Index
Formerly known as the Dow Jones UBS Commodity Index. The Bloomberg Commodity Index is calculated on an excess return basis and composed of futures contracts on 22 physical commodities. It reflects the return of underlying commodity futures price movements.

Dow Jones U.S. Select REIT Index
The Dow Jones U.S. Select REIT Index intends to measure the performance of publicly traded REITs and REIT-like securities. The index is a subset of the Dow Jones U.S. Select Real Estate Securities Index (RESI), which represents equity real estate investment trusts (REITs) and real estate operating companies (REOCs) traded in the U.S. The indices are designed to serve as proxies for direct real estate investment, in part by excluding companies whose performance may be driven by factors other than the value of real estate.

The S&P 500 Industrials Select Sector Index measures the performance of industrial stocks, as classified by the Global Industry Classification Standard (GICS). Every Select Sector stock is also a constituent of the S&P 500 Index. It is float-adjusted market capitalization weighted.

The S&P 500 Information Technology Index comprises those companies included in the S&P 500 that are classified as members of the Global Industry Classification Standard (GICS) information technology sector.

The S&P 500 Materials Index comprises those companies included in the S&P 500 that are classified as members of the Global Industry Classification Standard (GICS) materials sector.

The S&P 500 Real Estate Index comprises stocks included in the S&P 500 that are classified as members of the Global Industry Classification Standard (GICS)® real estate sector.

The S&P 500 Utilities Select Sector Index measures the performance of utility stocks, as classified by the Global Industry Classification Standard (GICS). Every Select Sector stock is also a constituent of the S&P 500 Index. It is float-adjusted market capitalization weighted.

The S&P 500 Energy Select Sector Index measures the performance of energy stocks, as classified by the Global Industry Classification Standard (GICS). Every Select Sector stock is also a constituent of the S&P 500 Index. It is float-adjusted market-capitalization-weighted.

The S&P 500 Consumer Staples Select Sector Index measures the performance of consumer staples stocks, as classified by the Global Industry Classification Standard (GICS). Every Select Sector stock is also a constituent of the S&P 500 Index. It is float-adjusted market capitalization weighted.

The S&P 500 Consumer Discretionary Select Sector Index measures the performance of consumer discretionary stocks, as classified by the Global Industry Classification Standard (GICS). Every Select Sector stock is also a constituent of the S&P 500 Index. It is float-adjusted market capitalization weighted.

The S&P 500 Health Care Index comprises those companies included in the S&P 500 that are classified as members of the Global Industry Classification Standard (GICS) health care sector.

The S&P 500 Telecommunication Services Index comprises those companies included in the S&P 500 that are classified as members of the Global Industry Classification Standard (GICS) telecommunication services sector.

The views expressed in this publication reflect the personal views of the Ameriprise Financial Services analyst authoring the publication. The views expressed are as of the date given, may change as market or other conditions change, and may differ from views expressed by other Ameriprise Financial associates or affiliates. Actual investments or investment decisions made by Ameriprise Financial and its affiliates, whether for its own account or on behalf of clients, will not necessarily reflect the views expressed. This information is not intended to provide investment advice and does not account for individual investor circumstances. Investment decisions should always be made based on an investor's specific financial needs, objectives, goals, time horizon, and risk tolerance.

Past performance is no guarantee of future performance. 

Diversification does not assure a profit or protect against loss.

Fixed-income securities present issuer default risk.

Investments in a narrowly focused sectors may exhibit higher volatility than investments with broader objectives. An investment in a sector is subject to market risk economic risk, and mortgage rate risk.

Information provided by third parties is deemed to be reliable but may be derived using methodologies or techniques that are proprietary or specific to the third-party source.

Stock investments involve risk, including loss of principal. High-quality stocks may be appropriate for some investment strategies. Ensure that your investment objectives, time horizon and risk tolerance are aligned with investing in stocks, as they can lose value.

Except for the historical information contained herein, certain matters in this report are forward-looking statements or projections that are dependent upon certain risks and uncertainties, including but not limited to, such factors and considerations as general market volatility, global economic and geopolitical impacts, fiscal and monetary policy, liquidity, the level of interest rates, and historical sector performance relationships as they relate to the business and economic cycle.

Investment products are not federally or FDIC-insured, are not deposits or obligations of, or guaranteed by any financial institution, and involve investment risks including possible loss of principal and fluctuation in value.

Ameriprise Financial Services, Inc. Member FINRA and SIPC