Vanguard Global Chief Economist Joe Davis recently rolled out his “forecast” for a 50% probability of a stock market correction in 2020. 50/50? …That’s not even a forecast.
Besides being a total disservice to investors, his forecast-- or whatever you want to call it-- is probably just plain wrong. I’d say the probability is much higher, probably more like what they’re saying over at Wells Fargo, that we’ll see a five to ten per cent correction in early 2020. Beyond the early part of the year, if I were to set all personal bias aside, I’d say that a unified Democratic result, where the party secures the presidency as well both chambers of Congress, would be terrible for stocks. On the other hand, an executive branch and legislative branch at odds with each other would likely mean a very strong end to the year for equities.
But of course, we have to keep it in perspective. Tax cuts, the Fed, the deficit, the national debt, earnings, politics, etc. are all things that we know. 2019 may have felt difficult based on the headlines, but the reality is that people made a lot of money last year, and all these things are baked in. As Jeff Gundlach likes to say, this is the "bloodless verdict" of the market-- and the market was up big.
Record prices and peak valuations have raised concerns over the outlook for stocks, but the 2010’s provided us with some valuable lessons that I think will prove to be helpful in the coming decade:
Your asset allocation will likely have a bigger impact on your performance than your security selection. Asset allocation is perhaps more boring than security selection, but it will almost always be the most significant part of your performance attribution.
Something will happen this year that doesn’t make any sense at all. Something is bound to defy expectations whether it involves geopolitics, irrational market movements, corporate takeovers, huge gainers, huge losers, or whatever. I’ve learned I’ll almost always be surprised by markets to some degree and that the trick is to not be surprised that you’re surprised.
In order to be successful, you will need to invest for time in the market, not timing the market. The single best investment you can make will likely be an increase in your savings rate.
“Timing” markets is a difficult task even for professional investors, and while investors may be lucky enough to avoid drawdowns, they may still fail to benefit from rebounds. We view a long-term, strategic mindset as the bedrock of investment strategy, and that’s certainly not changing in 2020. The point is that we probably will see some bouts of volatility in the coming year, but we expect moderate economic growth, subdued inflation, and fluid political dynamics to be supportive for equities. When it comes to price corrections, valuations normalize through earnings and time.
Many market observers in 2019 believe they witnessed cyclical warning signs which start the countdown to the next recession. However, we do not believe a recession is a foregone conclusion. Rather, we expect a modest global expansion to be sustained in 2020 by the stability of the consumer, committed central banks, financial condition tailwinds, and improved visibility on persistent geopolitical issues such as Brexit, trade, US impeachment, and elections. Therefore, our recommendations are to:
Stick to your plan by maintaining strategic asset allocation
Seek bottom-up strategies over pure beta
Utilize income-oriented strategies and alternatives in light of moderating returns and episodic volatility
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