Q1 2020 Investment Outlook

Executive Summary

The year 2019 was one of solid economic growth and healthy returns from most asset classes. U.S. economic growth continued in line with the average growth rate for this expansion. Equity returns were stellar, though the pace of earnings growth slowed. Three rate cuts from the Fed helped to spur fixed-income returns to equity-like levels. After strong gains in the equity and fixed-income markets, allocations to alternative investments have become increasingly attractive [Exhibit 1 in full copy].

Economic Outlook

• In contrast with the previous year, 2019 offered a much more positive economic and market backdrop. The Federal Reserve’s accommodative policy supported gains in both equity and fixed-income markets.
• While the economic recovery is the longest on record, its slow and steady pace suggests it could continue for some time to come. Reports for real GDP growth in 2019 should slightly exceed 2.0%. 
• A shortage of workers is a possible constraint on future growth; increases in both the labor participation rate and productivity could help fuel further growth.
• Our outlook is one of cautious optimism, with many positive factors—including monetary easing in the U.S. and abroad—balanced by the risks presented by global and domestic political uncertainties.

US Equity Outlook

• Equities recorded outstanding gains in 2019, with U.S. stocks up 31.5% and international stocks up 22.0%
• Equity returns outpaced earnings growth and pushed valuations upward. Considering all prevailing conditions, this merits caution but not alarm.
• Technology was the strongest-performing sector for the year and played a major role in the indexes’ overall performance. 
• Looking ahead, with positive economic and earnings growth anticipated for 2020, we anticipate another year of positive equity returns, though they are more likely to be in the single-digit range.

US Fixed Income Outlook

• Bonds posted equity-like returns for the year, as the Fed cut rates three times from July through October and long-term Treasury yields plummeted.
• Investment-grade corporate bonds were among the biggest beneficiaries of the Fed’s actions and the generally favorable economic backdrop.
• With current tight credit spreads and low yields offering less opportunity for appreciation, the bulk of investors’ bond returns for 2020 are likely to come from interest payments. In this environment, we have addressed potential downside risk by upgrading the credit quality of our corporate bond sleeve and have been finding yield in some less-travelled sectors within securitized credit that offer more favorable yield spreads per unit of risk.
• We remain intrigued by the potential tailwinds in emerging markets; developed international markets remain plagued by negative interest-rate policies.