A great article (
link). Below are several quotes from this link.
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What do you expect to be the key driver of stock market performance over the course of 2020?Markets climbed a wall of worry in 2019 and nearly all risk assets did very well - essentially the opposite of 2018. We believe we have entered the fear of the fear of missing out. One thing we are watching closely are equity fund flows that were down last year. It's very rare for fund flows in stocks to be negative when the market is up so strongly. But recent data suggests that may be turning. It would be a bearish signal for us to see a large amount of new money flow into equities.
According to Goldman Sachs, two thirds of the market move since 2009 has been earnings growth. However, in 2019, just 8% of the S&P 500 move is explained by earnings growth.
We tend to be bullish when others are bearish and tend to get bearish when others are bullish. Last year, investors were maybe not bearish but definitely cautious given the trade worries and other geopolitical issues. However, today we seem to be moving toward a more euphoric phase which does have us concerned.
What do you expect out of the yield curve in
2020 and what impacts will that have on the bond market and the economy in general?
On the long-end of the curve, we think rates could inch higher but shouldn't jump significantly like we saw in 2017. If I had to make a bet where the 10-year yield will be at year end, I would say around 2.15%.
What are some portfolio tilts and sub-sectors you think investors should focus on this year?We believe this year could look a lot like 2017 with some minor changes. First and foremost, we think the dollar rolls over and starts to decline. Dollar strength was largely due to the Federal Reserve raising rates for the last few years through 2018. With the Fed lowering rates three times last year (-75 bps) that should start reverberating throughout the markets this year, especially the dollar.
If the dollar does start to decline, we think international equities could finally shine. They have drastically underperformed US equities in the last 10 years. However, they should rebound. Europe and Japan have experienced much slower growth than the US during the recovery and continue to have worse demographics.
In fact, from a valuation standpoint, US stocks have never been more overvalued relative to the rest of the world. This is eventually likely to mean revert and we think a lot of it is due to the negative sentiment regarding the euro and Brexit.
Value stocks may finally do better than growth stocks thanks to the steeper yield curve. The thesis of owning growth stocks during a flattening yield curve and value stocks during steepening could prove true here. We also like small caps more so than large caps (and especially mid caps) given the 20-year low relative valuations. Emerging markets look particularly interesting.
I would still stay away from energy which looks like is going through a secular shift away from fossil fuels.
In fixed income, where are you allocating capital for 2020?1)
Municipals: We've been pushing munis for most of the last year as rates appeared poised to drop. Even today, we think rates pushing 2.00% are not a bad place to put
capital.
And when you factor in the tax equivalent yields of munis (especially muni CEFs), and consider the risk of these securities which is extremely low, it's hard to beat this sector.
(2)
High Yield / Floating Rate: . At these levels, we would say investors in high yield are coupon clippers, meaning that you are likely to receive the yield only with little to no
capital gains. The risk is to the downside.
Our favorite area of the market remains mortgages (for the third year in a row). We place them into the high yield/ floating rate sector simply because of our focus on non-agency MBS, which tend to be unrated or lumped into non-investment grade/high yield. Many of these mortgages also are floating rate. Our thesis remains that the investors tend to fight the last battle, which with the Financial Crisis centered on the mortgage market.
(3)
Real Assets / REITs: The sector was an under performer in 2019 and we think could be one of the best performers in
2020 as rates stabilize. The fourth quarter of 2019 was the driver of that underperformance as investors moved back to a risk-on environment and away from the "bond proxies."
Total cash returns could be as good as 9% in
2020 with approximately half coming from the yield and 4% to 6% earnings growth. If we see rates meander lower, we think there will be renewed interest in the sector which could help push up prices further. Fundamentals in the sector are strong with property values continuing to move higher.
(4)
Preferreds:The asset class is small and has low liquidity which tends to exacerbate the moves lower. It's when these liquidity-induced selloffs occur that you should be buying shares of high quality names. While most talking heads poo-poo preferreds when rates are rising due to their perpetual maturities, this can be an advantage for retail investors. When rates fall, the issuer can call the shares at their discretion and replace them with a lower yielding issue. Today, we are seeing "refinancings" occur even if they can save just 50 bps of interest expense. If rates rise, while the "perpetual value" of your shares may go down, it does lock in your income stream for longer.
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FD: and this is why most of my money is in HY Munis + Multisector specializing in MBS/Securitized
