In 2019, investors had reasons to be happy. The S&P 500 Index, a widely used tool for measuring stock performance, was up about 30 percent for the year, and other indexes also rose significantly. But what can you expect from the financial markets in 2020?
As baseball Hall of Fame player Yogi Berra once said: “It’s tough to make predictions, especially about the future.” And that’s certainly true for the financial markets, which have often defied expectations.
However, many investors do have expectations – and they are often colored by recent events. This “recency bias” can be a problem, because if you base your hopes on what happened in 2019 – a great year for the markets – you might end up being disappointed. Even worse, you could overreact to these feelings by making investment moves that aren’t really in your best long-term interests.
So, feel free to enjoy your investment results of 2019 – but don’t use them as a guide to the future. Instead, when evaluating the investment landscape for 2020, consider several factors that may influence the financial markets:
- Corporate earnings – The financial markets did well in 2019 in spite of lackluster corporate earnings growth through most of the year. Nonetheless, earnings are typically a key driver of stock prices, and the good news for investors is that many experts predict earnings and revenue growth to rebound in 2020.
- Consumer spending – In recent years, consumer spending has helped to power economic growth, which, in turn, has supported rising share prices over time. In 2020, we believe the combination of low interest rates and a strong labor market may continue to support strong consumer spending. Still, some possible “headwinds” remain, in the form of sluggishness in business investment and continued trade uncertainty between the U.S. and China, despite the recently signed partial trade deal.
- Inflation – Because inflation erodes investment returns, it always poses an underlying threat to investors. But over the past several years, inflation has been mild, and the Federal Reserve’s Federal Open Market Committee, at its meeting in December 2019, forecast that inflation would remain low in 2020. 1
- Interest rates – Interest rates remain low, which is usually good news for investors, because low rates make it cheaper for businesses to borrow to expand their operations – and growing businesses are often attractive investment opportunities. Investors will closely follow the Federal Reserve this year for signs of where rates may be headed. Given that global interest rates are also quite low – and even negative, in some cases – it seems likely that the Fed will keep rates low for the foreseeable future.
- Global growth – Global growth slowed in 2019, but some factors point to an upswing in 2020. For one thing, if we do see an improved trade relationship between the U.S. and China, it could help accelerate or increase global trade and manufacturing. Also, major central banks have been trying to boost their economies by cutting interest rates, and since there’s usually a lag between rate cuts and their impact, we could see evidence in 2020 that these stimulus efforts are working.
- Politics – Of course, we’re having an election in 2020, and market volatility tends to be higher in election years. This usually isn’t because of the effects of any new laws – in fact, major legislation rarely gets passed during the year in which a presidential election is held. However, issues such as taxes, tariffs and regulations can influence market sentiment – sometimes far in advance of their actual effect on the economy. In any case, it’s probably unwise for you to adjust your investment strategy in response to what may happen after an election. In general, it’s a good idea not to “play politics” with your portfolio.
- Unexpected events – They happen every year – unpredictable events that rattle the financial markets. Already in 2020, we’ve seen a plunge in stock prices attributed, at least in part, to the spreading coronavirus from China, which investors feared could lead countries to close borders and restrict trade and travel, thereby impacting economic growth.
As you can see, there’s a lot to think about when trying to determine how the financial markets will perform in 2020 – and that’s the case every single year. But no matter how any of the above factors play out this year, you can help yourself by following a long-term investment strategy based on your goals, risk tolerance and time horizon. And it’s important to stick with - investment principles, such as diversification and taking a long-term perspective. So, don’t let the headlines of today, or the anticipated headlines of tomorrow, drive your investment moves. Ultimately, it’s the decisions you make that help determine your success as an investor. And you can get help in making those decisions by contacting an Edward Jones financial advisor.