In a phrase, keep investing in stocks.
At the risk of appearing blindly bullish, this eternal optimist will attempt to provide some context for BWFA’s thinking going forward into 2020 and our overall approach to investing for our clients.
As you may imagine, we are cautiously optimistic in our outlook for stocks generally, and our top buy rated stocks specifically, for 2020, as we look forward with what we know now.
WHAT DO WE KNOW NOW?
- U.S.- China trade tensions seem to be easing
- U.S. corporate earnings, dividends, tax conditions and merger activity should be healthy and contribute to stock shares going higher
- Positive environment for the American consumer fueled by accommodative income tax policy and strong job and wage conditions which may be an additional positive contribution to a further run for the stock market
- Anticipation that developed countries abroad will provide stimulus to bring their economies along to contribute to worldwide economic stability and in some cases country economic improvement
WHY THEN BE “CAUTIOUSLY” OPTIMISTIC?
We have been in one of the longest running bull periods of almost 11 years running and it will have to end at some point, so BWFA remains vigilant and looks for those investments that provide long term opportunities for our clients, as a recession will come at some point—that, we know also.
What we do not know is when a recession will arrive. We likewise do not know how long it will last, and we do not know what the stock market will do.
From our research, to approximate what could happen, we found that recessions last on average 9 months, when looking at the last 100 years of recessions. During the 14 recessions we looked at during that time, stocks (as measured by the S&P 500) lost “only” 2.7% on average, and on average there is approximately 4 years between each recession. As important as the downside of the market, if not more so, our research shows that the following year after a recession ends, the market went up over 15% on average in those following 12 months!
So, BWFA will not suggest that we can “time” the arrival or end of a forthcoming recession. Also, we will not do anything drastic in our capacity as investment fiduciaries for our clients.
WHAT DO WE DO NOW?
Since there are mostly strong positive indicators as listed above, BWFA will maintain our target allocations within the BWFA investment model categories, albeit within reasonable target variances to those targeted allocation goals.
Recently there was an “inversion of the yield curve” which can be a recessionary trigger. The yield curve inversion means simply that long term bond interest rates are lower than short term bond interest rates. Many prognosticators predicted the arrival of a recession several months ago when this inversion first occurred. We are still waiting — and since then the market has continued to perform well.
The economy is still healthy but not as healthy as a year or two ago, so hence BWFA’s vigilance and cautious optimism.
So, going forward into 2020 we remain committed to our investment models exposure to stocks, particularly those stocks and sectors we like, and will make adjustments as we go forward to address economic and market specific and company specific changes, without emotional or drastic response to the ever changing and repeating cycles in the economy and investment markets.
Joseph Manfredi | MBA | Chief Operating Officer / Senior Portfolio Manager | jmanfredi@bwfa.com