Our 2020 outlook: We are prepared for challenges and focused on opportunities.

 

Our Top Market Takeaways for the week ending January 3, 2020.

Outlook 2020

Prepared for challenges, focused on opportunity

Happy New Year! It’s been an eventful start to the year. Heading into Friday, news broke that a U.S. strike in Baghdad killed General Qassem Soleimani (a top Iranian military leader), further escalating tensions between the United States and Iran. Markets reacted in a risk-off fashion: Equities around the world fell, safe-haven assets like gold and government bonds rallied, and the price of oil jumped. Questions remain as to how Iran may respond and what the broader implications may be.

When geopolitical events like this happen, the first thing we do is look for links between the event and markets and the broader economy. The most important potential link this time is likely oil supply disruption leading to substantially higher prices. We are taking this risk seriously, but at this point, we don’t think the likelihood of this scenario becoming reality is enough to change our economic and market views. In the context of our 2020 Private Bank Outlook, this geopolitical event is similar to other “wild card” scenarios that we are prepared for. In short, we don’t believe this should derail your investment plan.

That’s why the theme of this year’s outlook is focus. Amid a swirl of uncertainty about the sustainability of the economic cycle, politics and geopolitics, it is easy to get distracted from what is important. In this outlook, we hone in on what we believe will be the most important variables in defining investment performance in 2020, and beyond.

Here are our top conclusions:

  • We don’t see a recession in 2020. Despite the risks, we believe the economy will continue to grow in 2020, avoiding recession for an 11th year. Manufacturing is stabilizing, the consumer is strong, and the Fed’s pivot has breathed new life into the cycle.
  • We believe stocks will outperform bonds in 2020. Our portfolios maintain a modest overweight to stocks. The United States is our preferred region for its mix of upside return potential and relative stability, should conditions worsen.
  • We prefer core bonds to cash. Despite low (even negative) yields, we believe core bonds provide a valuable buffer in the event of an unexpected downturn. We also prefer core bonds to cash, as bonds tend to outperform cash in adverse market conditions.
  • Central banks appear powerless to spur economic growth. Ultra-low interest rates have supported asset prices, but have starved investors for yield. To augment portfolio yield, we are looking to dividend growth equities, real estate and preferred equity.
  • Trade war and the 2020 election are not enough to derail your plan. Binary wild cards like the trade war and upcoming election deserve respect and can be important market catalysts. But our portfolios are positioned defensively across our platform, owing in part to these risks. As we develop clarity on which proposals will become actual policies, we will continuously reassess as we monitor for winners and losers related to both.

Get Top Market Takeaways delivered to your inbox.

We encourage you to contextualize our market views through the lens of your own goals.

So what should investors do?

  • Find growth in a low-growth world. We are excited about the opportunities presented by certain disruptive secular growth trends. We think investors should consider investment opportunities related to the global digital buildout, next-generation vehicles, 5G network infrastructure and the growing importance of cybersecurity.
  • Harvest yield. More than 20% of investment-grade debt in the world trades with a negative yield, and central banks seem poised to keep rates low. Investors need to consider alternative sources for income, such as real estate, preferred equities and dividend-paying stocks.
  • Invest through uncertainty. We are prepared for challenges. Across our platform, we have taken many steps to reduce portfolio risk, including a substantial reduction to our equity overweights and high yield bonds, and increased exposure to core fixed income. We remain attentive to quality and liquidity in portfolios—both important factors when the going gets tough.

We are prepared for the challenges and focused on the opportunities the next year may bring. In exploring this year’s outlook, we encourage you to contextualize our market views through the lens of your own goals. Consider the purpose, time horizon and priority level of your investments. Money intended for a near-term down payment on a new home should be considered differently from long-term money that is intended to grow over many generations. Understanding the purpose of an investment can sharpen the focus of how the capital should be allocated, and can allow you to rise above the noise of an uncertain environment to make more confident and intentional decisions.

We look forward to continuing our dialogue with you throughout the year.

 

All market and economic data as of January 2020 and sourced from Bloomberg and FactSet unless otherwise stated.

We believe the information contained in this material to be reliable but do not warrant its accuracy or completeness. Opinions, estimates, and investment strategies and views expressed in this document constitute our judgment based on current market conditions and are subject to change without notice.

RISK CONSIDERATIONS

  • Past performance is not indicative of future results. You may not invest directly in an index.
  • The prices and rates of return are indicative, as they may vary over time based on market conditions.
  • Additional risk considerations exist for all strategies.
  • The information provided herein is not intended as a recommendation of or an offer or solicitation to purchase or sell any investment product or service.
  • Opinions expressed herein may differ from the opinions expressed by other areas of J.P. Morgan. This material should not be regarded as investment research or a J.P. Morgan investment research report.