Expectations are high after a big year for stocks.
U.S. equities finished 2019 on a high note and most investors are looking ahead. The last time the S&P 500 index gained at least 28% in a single calendar year was 2013. Fortunately, it followed up that big year with another 11.3% gain in 2014. The Bank of America analyst team, led by Savita Subramanian, recently compiled a list of trends for investors to watch in what could be another volatile year for stocks in 2020. Here are seven things Bank of America says investors can expect this year.
Election headlines will move the market.
Online prediction market PredictIt suggests President Donald Trump has roughly a 50% chance of reelection in 2020, and Subramanian says the election may be the biggest catalyst of the year for stocks. She says a victory by a liberal Democrat, such as Elizabeth Warren or Bernie Sanders, would be a worst-case scenario for the market given their aggressive regulation and tax proposals. A win by Joe Biden or another moderate Democrat would likely be a modest negative for stocks, while a Trump victory would likely produce little market reaction or trigger a modest relief rally, Subramanian says.
Money will flow from bonds to stocks.
The 10-year U.S. Treasury yield is currently 1.91%, and Subramanian says Wall Street allocation to bonds relative to stocks will likely be historically low in 2020. In fact, the S&P 500 dividend yield of 1.78% even surpassed the yield on 10-year Treasurys briefly in the fourth quarter. When this phenomenon has occurred other times throughout history, stocks outperformed bonds 94% of the time over the following 12 months. In fact, the average outperformance was an impressive 23%. Subramanian says investors will start returning to bonds when the 10-year yield hits 5%.
International economies will outperform the U.S.
Bank of America economists are expecting the trend of U.S. economic growth outpacing much of the rest of the developed world will reverse in 2020. Economists are projecting decelerating U.S. economic growth, while economic growth for the rest of the world picks up. Subramanian says fund managers are currently overweight U.S. equities and underweight emerging markets, Europe and Japan, creating room for significant rotation. Policy clarity following a UK Brexit in January could trigger a relief rally in European stocks. In addition, progress on the trade war front could create a tailwind for Chinese equities.
Trade war will transition to tech war.
Subramanian says there’s a real risk that trade tensions with China could escalate following the 2020 U.S. election. In fact, Bank of America says the next phase of the trade war could be a technology war in which trade disagreements and national security concerns result in the U.S. and Europe lowering their dependence on China. Improvements in automation and rising costs in China are already shifting global supply chains. Bank of America anticipates the world could soon resemble the duel global economy that was prevalent during the Cold War between the U.S. and the Soviet Union.
Rotation from growth and momentum to value.
Growth stocks outperformed value stocks throughout the 2010s bull market, but Bank of America says 2020 may finally be the year value rules. Subramanian is forecasting 8% S&P 500 earnings per share growth in 2020 and says earnings growth will capture the attention of professional money managers who are heavily overweight momentum stocks. In fact, value stocks have never been as cheap relative to growth stocks as they are today, she says. Bank of America is most bullish on the financial sector, the most undervalued sector relative to the overall S&P 500.
The rise of the stakeholder.
Subramanian says the shift from a shareholder mentality to a stakeholder mentality will pick up steam among investors in 2020. Environmental, social and governance (ESG) considerations are not only about responsibility, but they also help reduce risk and set up long-term growth opportunities for investors. In 2019, several of the largest CEO resignations on Wall Street were related to ESG missteps or concerns. Subramanian says investors have lost roughly $500 billion to ESG blunders in the past five years. Investors will continue to push companies to operate responsibly, and ESG leaders could also lead the market higher in 2020.
Risks to the rally remain.
The market is entering 2020 on much more stable footing than it entered 2019, but Subramanian says investors shouldn’t lose sight of potential risks. Economists see a low probability of a U.S. recession in 2020, but trade tensions, slowing economic growth, geopolitical headlines and a slump in consumer spending could potentially derail the rally. Election-related risk is centered on the outlook for taxes, trade policy, antitrust, government spending and other regulations, Subramanian says. In addition, institutional investors have piled into private equity funds in recent years, creating a potential liquidity problem in the event of a severe downturn.
Stock market trends to expect in 2020
Election headlines will move the market.Money will flow from bonds to stocks.International economies will outperform the U.S.Trade war will transition to tech war.Rotation from growth and momentum to value.The rise of the stakeholder.Risks to the rally remain.