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Fundamentals declined but assets class performance was strong in 2019. Is that scenario about to flip in 2020?

 

2019 was an impressive year for financial assets with major U.S. and international equity and fixed income indexes posting double digit returns.

Source: Bloomberg.

Source: Bloomburg.

The key to success in 2019 in the equity markets was to be overweight technology related companies as the Information Technology and Communication Services industries were two of the three areas that outperformed the S&P 500, and combined for 12.8% of the S&P 500’s 28.9% return.  The other major key to successful equity returns in 2019 was being overweight U.S. equities, as they continued to outperform other major developed and emerging market regions.  This strong equity performance occurred despite the fact that U.S. and Global GDP growth rates slowed throughout 2019, and S&P 500 earnings growth projecting to be negative for each quarter of 2019. 

Source: Federal Reserve Economic Data - St. Louis Fed.

Source: Federal Reserve Economic Data – St. Louis Fed.

Source: FactSet.

Source: FactSet.

One of the factors that may have contributed to the strong equity performance was the decline in interest rates.  This also helped fixed income performance as long duration sectors benefited from the decline in interest rates, and the change in monetary policy helped lower credit spreads. 

Source: Bloomberg.

Source: Bloomburg.

2019 was a confusing year from a macro standpoint as equity markets and lower rated credit had strong returns, despite weakening earnings and economic growth.  Perhaps investors were potentially discounting the shift in monetary policy and eventual positive impact it would have on earnings and economic growth in 2020. 

Current estimates for 2020 S&P 500 earnings growth is 10%.

Source: FactSet.

Source: FactSet.

Current equity market multiples and credit spreads seem only justifiable if this recovery in earnings is realized and economic growth does not continue to decelerate below consensus estimates of 1.8%.

Copyright 2020 Ned Davis Research, Inc. Further distribution prohibited without prior permission. All Rights Reserved. See NDR Disclaimer at www.ndr.com/copyright.html . For data vendor disclaimers refer to www.ndr.com/vendorinfo/ .

Copyright 2020 Ned Davis Research, Inc. Further distribution prohibited without prior permission. All Rights Reserved. See NDR Disclaimer at www.ndr.com/copyright.html. For data vendor disclaimers refer to www.ndr.com/vendorinfo/.

Copyright 2020 Ned Davis Research, Inc. Further distribution prohibited without prior permission. All Rights Reserved. See NDR Disclaimer at www.ndr.com/copyright.html . For data vendor disclaimers refer to www.ndr.com/vendorinfo/ .

Copyright 2020 Ned Davis Research, Inc. Further distribution prohibited without prior permission. All Rights Reserved. See NDR Disclaimer at www.ndr.com/copyright.html. For data vendor disclaimers refer to www.ndr.com/vendorinfo/.

There is also a potential risk that fundamentals improve in 2020, but that risk asset performance is muted as the strong rally in 2019 has already discounted this scenario.  

2020 is shaping up to be another interesting year as there is a possibility we will see a reversal of 2019, where fundamentals improve while asset class performance declines. 

 

Rank Dawson, CFA
Vice President, Investment Strategy

Boyd Watterson Asset Management, LLC

 

The views expressed herein are presented for informational purposes only and are not intended as a recommendation to invest in any particular asset class or security or as a promise of future performance.  The information, opinions, and views contained herein are current only as of the date hereof and are subject to change at any time without prior notice.