Three Key Market Questions in 2020

Jay Pluimer, AIF® CIMA® Wednesday, 19 February 2020

We’ve had an interesting start to the new decade as a variety of key economic, political, and investment questions are working together to create market volatility and investor uncertainty. There are a few questions that come up frequently during client conversations and hopefully we can share the research we’ve conducted to find answers. As evidence-based investors we like to look at historical market information so we can inform our views of the present based on what has happened in the past. History may not necessarily repeat itself, but historical data can provide helpful perspective.

Question #1: Can the stock market have another good year after a big return in 2019?

This question can be phrased a couple different ways, including whether now is the time to sell out of the market to capture the returns from last year or maybe decrease your Stock allocation in 2020 to reduce risk. These are all logical questions because they reflect concerns about what happens after a year like 2019 where the S&P 500 was up 31.5%. The stock market has been on a generally upward trend since the Great Recession in 2008-09 and the next question to ask is how much longer this can continue. The market rally has lasted for 127 months and is now the longest in history, which also coincides with 2010 being the first decade without a recession. However, it’s important to note that although this is now the longest recovery it has been a much slower market rebound than usual, meaning there is still a lot of upside opportunity relative to prior bull markets. In addition, the following chart reflects that performance in 2020 could be pretty good since the year after a big market rally has averaged +15.2%:

Based on the combination of multiple market data points reflecting additional upside market opportunities we are recommending that clients remain fully invested to your target allocation. We are always looking for opportunities to rebalance as our team completes a weekly review of all client portfolios to ensure that the mix of Stocks and Bonds is aligned with your target allocation so we can avoid taking on extra market risk if the amount of Stocks gets too high in a portfolio.

Question #2: What impact will the Coronavirus have on the markets?

The Coronavirus is a serious epidemic and we empathize with all the people affected by this outbreak. At this time there have been over 72,000 infections with over 1,800 deaths, and the final numbers for infections and deaths is only expected to increase over time. The markets had some initial reaction after the World Health Organization (WHO) announced that the Coronavirus qualified as an epidemic, but the Stock market has recouped the initial losses and continued to rise. Some of the initial market and economic impacts from the epidemic have been offset by Chinese, American, and European Banks adding money and liquidity to the market. In addition, we’ve had time to put the Coronavirus in perspective relative to Influenza A&B which have affected over 19 million people in the US alone in 2020 with 10,000 deaths. Finally, the following chart reflects that the markets have continued to move upward during prior epidemics (please note that SARS and Swine Flu occurred during global economic recessions after 9/11 and the Great Recession, respectively):

Based on the historical evidence we are closely monitoring the potential impact from Coronavirus on markets, but at this point, we haven’t seen a reason to make any changes to our investment approach. There will likely be company- and industry-specific impacts from the mass quarantines in China which will affect production levels, travel, consumption, and a variety of other areas. However, those impacts are expected to be short-term in nature and will most likely be offset by a rebound later in the year.

Question #3: Will the 2020 US Presidential Election affect stock market performance?

The biggest investment impact from the US Presidential election is uncertainty about which candidate and which party will eventually win the election, and the market generally responds negatively to uncertainty. Market statistics consistently demonstrate that a President doesn’t personally dictate market performance, but the combination of governing bodies will determine legislation that can affect the broader economy when industries like Energy, Health Care, and Autos are in the limelight. The following chart indicates that election years generally tend to underperform non-election years, but then the following year does better once the uncertainty involved with an election has been resolved:

Once again, based on the long-term evidence, we recommend that clients stay fully invested according to their target allocation as we do not anticipate a market disruption from the Presidential election. 

We hope it has been helpful to address these three common questions about the market environment in 2020. It is always a pleasure to continue these conversations in more detail over the phone, in-person, or via Zoom so please feel free to reach out to our team if you would like additional information. In addition, we want to make sure to have accurate cash plans in place for all clients to ensure any unexpected market dips won’t have an impact on their lifestyle or known upcoming expenses, so please keep us updated on any changes. We appreciate the opportunity to share market evidence and will be happy to address additional questions in the future!

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About the Author

Jay Pluimer, AIF® CIMA®

Jay Pluimer, AIF® CIMA®

Jay Pluimer brings over 25 years of experience working with Investment Committees and individual investors to Flourish Wealth Management. He has built a career focused on investment research, client conversations about investments, and building diversified portfolios to help clients accomplish their goals. As Director of Investments, Jay is passionate about the opportunity to deliver individualized investment solutions for our clients that help align their resources and goals.

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