Thanksgiving 2019: will investors enjoy further returns?

We share a range of views on the outlook for US markets.

November 28, 2019

The holiday season is typically a positive time of year for US markets. However, there are reasons to be cautious. What can investors expect from US markets and the economy as we move into 2020? Here are several viewpoints.

1) All bias aside, one of the ongoing attractions of US equities is the innovation and potential disruption coming from the large‑cap area of the market, particularly from companies utilising large data sets to their advantage. We are not talking about any potential data privacy issues, but rather the analysis of vast sets of accumulated data to improve the consumer experience, for example.

Historically, market disruption has started with smaller companies leveraging a new and innovative product or service. However, data is driving much of the innovation in the market today. It takes very large data sets to drive the kind of disruption that we are seeing. Given this volume of data tends to be less available to smaller companies, it is predominantly larger companies driving today’s market innovation. This trend has played out significantly over the past five years. Any use of data must be appropriate and within regulations, but the ability to beneficially utilise data is driving better targeting of advertising, leading to happier customers and improved revenues.
Taymour Tamaddon, portfolio manager of the T. Rowe Price US Large Cap Growth Equity Fund.

2) As was widely expected, the US Federal Reserve cut the funds rate another 25bps last month, citing the global backdrop and below-target inflation as reasons for the easing. Also as expected, the Fed appeared to shift to a wait-and-see mode, changing from a stance in September that it "will act" as appropriate to sustain the expansion to its latest language that it will continue to "assess" the appropriate policy path going forward. Chairman Jerome Powell followed up in his press conference by noting that monetary policy now appears to be in a good place.

Our base case assumes the Fed will pause for the foreseeable future as the impact of its rate cuts this year continues to filter through the economy and the Federal Open Market Committee (FOMC) takes time to assess developments across the global economy. Looking ahead, we see US rates as attractively priced. While current valuations may represent "fair value" against the domestic economic picture, when set against a world of ultra-low and negative rates, we see them as biased to fall.
Ellen Gaske, lead economist G10 economies, and Robert Tipp, chief investment strategist and head of global bonds, at PGIM Fixed Income.

3) The confidence of US conference board CEOs is close to an all-time low, with very negative consequences for the economy. This shock is starting to impact on consumers, who are spending less than expected at a time when government spending and trade tensions are not helping. We expect this contagion to spread, and consumer savings to rise as this deleterious story takes hold – although a US-China trade deal in the first quarter of 2020 should help reverse the situation.

The odds are that the Federal Reserve will go for a full cycle of easing rather than a mid-cycle correction. We expect a rapid economic rebound by mid-2021, by which time the Fed should once more have embarked on a path of monetary tightening.
Sebastien Galy, senior macro strategist at Nordea Asset Management.

4) Donald Trump is not just another US president. He speaks to far-reaching uncertainty and volatility in the global political and economic landscape. The US election will bring all of this into focus. Next November, the differences in candidates’ platforms are likely to be far wider than they have been over the past 50 years. The field of Democratic contenders is testing out unusually interventionist policies that could have a profound impact on the energy, financial, tech and healthcare sectors, which make up more than half of the S&P 500.

We believe the recent turn in economic data and investor sentiment is real and there is opportunity in cyclical, value-oriented and small-cap stocks that have underperformed for so long. However, we would caution against assuming that this is the start of a sustained trend for greater risk appetite. Even if growth picks up, the cycle is long in the tooth and central banks have fewer tools to prop things up. Most of all, the political landscape is dotted with pitfalls that could destabilise even a full-throttle economy. For these reasons, we envision 2020 drawdowns to be lengthier and deeper than the brief dips of 2019.
Joseph Amato, president and CIO – equities at Neuberger Berman.

5) We recently increased our regional allocation to the US. Over the last quarter, the US economy continued to provide a favourable backdrop for REITs. Although its manufacturing sector slowed, unemployment remained near a 50-year low and consumer spending remained fairly robust. These factors, coupled with expectations for continued policy accommodation by the Federal Reserve, could be tailwinds for US REIT valuations.

Within the US REIT market, we maintain a favourable view on all forms of rental housing, as well as technology-related REITs such as data centres, which recently benefited from rising capital expenditures by tech companies. Although secular headwinds remain for retail property owners, those issues appear to be reflected in current share prices and we have closed out our underweight in the sector.
Jon Cheigh, portfolio manager of the Cohen & Steers Global Real Estate Securities Fund.

6) The US Federal Reserve’s abrupt policy U-turn this year is likely to support markets. However, the recovery is likely to be fleeting, as too much positivity is attached to the longer-term impact of the stimulus and to the probability of positive economic outcomes – such as a resolution of the US-China trade war. As an overlay to this, equity market valuations are not supportive of extensive gains. In the US, the 10-year cyclically adjusted price earnings (CAPE) ratio for the S&P 500 remains in lofty territory, at more than 30x. This is far higher than the long-term average of 16.7x.

So, absent a significantly strong surge in corporate profitability, we cannot argue for an overly positive outlook on returns. We do not believe monetary policy stimulus alone will be sufficient to create such an environment. Accordingly, we see US returns in single-digit territory and remain cautiously optimistic only in the short term.
Arno Lawrenz, global head of multi-asset strategy at Ashburton Investments.

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