Investment views heading into 2020
Bob Landaas: Kyle, I think this year was the classic, “The market climbs a wall of worry.” We had the Fed to worry about. We had the trade conflicts to worry about. We finished the year with the trade war mostly resolved, at least for now, the Fed on hold, as they say, throughout next year. And we’re finishing at all-time records.
Kyle Tetting: I think there’s plenty for clients to be excited about in terms of stock market returns. I think the good news though, is that for balanced portfolios, it wasn’t just stocks. You saw bonds participate. You saw, pretty much across the board, asset classes have very strong returns. And so Bob, I wonder what you’re talking to clients about right now as we look into the end of the year here.
Bob: Number one, as you say, bonds have had a fabulous year. Interest rates plunged, as you remember, in July into August. The 10-year Treasury yield plunged. A lot of foreign demand this year for the 10-year Treasury with $17 trillion now of negative yielding debt in Europe and Japan. It makes our 1.8% look pretty attractive on the 10-year. So, money just continued to pour into U.S dollars, keeping the dollar strong for most of the year. A little bit of an outset against international funds, but even they came back pretty strong by the end of the year.
Kyle: I think clients are so often looking to what should we expect for the future. And I think one of the things we often talk about is how difficult it is to really forecast, especially when you look at the uncertainties that are out there. So, you talk about a really good year for stocks, you talk about a really good year broadly for portfolios, and then you look ahead and go, okay, but there’s still a lot of things out there that might be cause for concern. I wonder if there’s anything in particular on your mind.
Bob: Well, Kyle, as you know it’s all about interest rates and earnings. And if you track our experience for 2019, you see that earnings were for all intents and purposes flat, yet stocks were up 25%, 26%, 27% for the year. So there was a temporary disconnect. I get the sense that big investors are looking into 2020 and beyond and liking what they see.
A little early to make the estimate, but earnings for next year look fairly decent, up 9.8%. They’ve toned that down a little bit from the 10.4% estimate from a month ago, but above-average earnings increases.
Number two, we have very low interest rates still. Low rates tend to be really good for stocks. I can’t think of the last time the Fed told us, “You don’t need to worry about us for a full year.” That they told us when the Fed met last Wednesday. That was pretty impressive.
Kyle: Obviously, we look at the trend for growth. We look at the fact that growth has slowed. Many people are predicting that it could slow a little further. And I think so often we want to focus on, is it going to be recession or isn’t it? I think maybe that’s the wrong focus, right? Perhaps it’s not just is it a negative number or not, which is that typical definition but really just more focusing on the fact that growth is going to be slower as we go ahead and so, you know, how do, how do you build a portfolio for that slower growth?
Bob: So to me Kyle, you know I’ve always liked value stocks. I’ve always liked the defensive positions you can create with value investing. To me, it’s not market timing but having the right mix of value and growth stocks. We Energies is an example, a classic example of a large-cap value stock. They could care less about what’s going on in China. They could care less about the slowdown in Asia. And so there are utilities, telecommunications, regional banks, regional insurance companies. Those folks are for the most part immune from the slowdown in Asia. They hold up a whole lot better in a weak market.
And I think secondly, growth stocks have been on a tear. You’ve got to acknowledge how well not only the FAANG stocks but some of the other tech stocks are doing this year. Apple is an example, up 75%, big increase. Microsoft had a good year. All the major tech stocks did extremely well. I think that trend is going to continue.
You know, short term, Kyle, you have to worry a little bit about the trade issues. You’ve got to worry about the trade war hasn’t been resolved. They just temporarily agreed to stop fighting. And so I think we’re going to be dealing with that next year.
I think a second problem that I worry about is the lack of business spending, that businesses haven’t seen clarity because of trade. They haven’t seen end demand be real strong, so they haven’t been motivated to spend. So that area of the economy is worrisome. CEO confidence levels, fairly weak. Diametrically opposite, consumer confidence numbers that have been pretty strong. But Kyle, you and I have talked on the podcast all year about just basic math. You look at 70% of the economy driven by the consumer, unemployment the lowest it’s been in 50 years, consumers are doing pretty good. You look at the next 16% is government spending. We’re approaching $1 trillion-dollar budget deficits; the government’s not afraid to spend money. So I’m up to 86% of the economy. The remaining 14% is business spending: Basically flat to weak, but it’s not enough to take us down.
If you look at the interest rate side, Kyle, I wouldn’t be surprised to see upward pressure on rates late next year. If the economy continues to mend and the global economy starts to gain strength, I think it’s just a matter of time before interest rates are going to firm up a little bit and inflation could even tick up. So I think you’ve got that to worry about.
And then finally, with the Fed basically saying that interest rates aren’t going up anytime soon, I think now is the time to maybe look at a little bit of the international plays that have really been beaten up. I don’t like to increase international exposure, as you know, unless I think the dollar is going to level off or perhaps weaken. And we’ve had a strong dollar now for a couple of years, and that’s really hurt American investors going overseas with their savings. So now with the Fed, for the most part, saying they’re done raising rates for a while, I think that’s going to create some dollar weakness and perhaps an opportunity to take another look at some of the international positions.
Kyle: Well Bob, 2019 was a great year, obviously, and I think plenty of things to look forward to in 2020. Thanks again for a great conversation.
Bob: Happy new year.
Bob Landaas is chairman and chief executive officer of Landaas & Company.
Kyle Tetting is director of research and an investment advisor at Landaas & Company.
Money Talk Video by Peter May and Jason Scuglik
Multiple reasons for an exceptional 2019, by Kyle Tetting
The outlook for value in your portfolio, a Money Talk Video with Kyle Tetting
2019 Investment Outlook Seminar, a Money Talk Video with Bob Landaas
Fed’s about-face, interest rates, earnings, a Money Talk Video with Bob Landaas and Marc Amateis
Over there: Investing in a global economy, a Money Talk Video with Kyle Tetting
What slowing growth means for investors, a Money Talk Video with Bob Landaas and Kyle Tetting
How to handle fears of recession, a Money Talk Video with Bob Landaas and Kyle Tetting
(initially posted December 31, 2019)
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