Markets in a Minute

Insights on the latest global investment news from our Chief Investment Officers, Omar Aguilar and Brett Wander.

January 15, 2020

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  • Equities:
    A solid backdrop for the new decade

    Omar Aguilar, Ph.D.

    Chief Investment Officer,
    Equities and Multi-Asset Strategies

    Relatively stable economic outlook supports markets

    Consumer spending, subdued inflation expectations, and tight labor markets continue to sustain the U.S. economy. Internationally, global central banks remain dovish and therefore accommodative regarding interest rates, while China's economy is improving, and potential fiscal stimulus in Europe may help resolve ongoing weakness in manufacturing.

    We expect lower market returns in 2020

    We expect lower stock and bond returns in 2020 than in 2019. Ample liquidity, improving balance sheets, and a robust credit market should support risky assets. However, above-average stock valuations, U.S. dollar strength, and rising labor costs may affect the highly anticipated earnings rebound.

    Positive sentiment subject to geopolitical risks

    Positive consumer and investor sentiment after an impressive 2019 continue to support risk-based assets, as trade war tensions between the U.S. and China have eased. Yet some trade uncertainty remains, while U.S. elections and Middle East tensions may fuel intermittent volatility this year.

    Consider reassessing portfolio risks and rebalancing

    Now may be a good time to reassess portfolio risks, while considering a slow rotation toward high-quality stocks with attractive valuations in the industrials, financials, and technology sectors. High-quality dividend strategies may provide income, stability, and price appreciation in 2020.

  • Fixed Income:
    The long-term effects of the Iran conflict

    Brett Wander, CFA

    Chief Investment Officer,
    Fixed Income

    How is the market pricing in conflict risk?

    With tensions heating up in the Middle East, many investors have been reevaluating their portfolio risks. By comparison, the market tends to filter out the latest headlines and focus more on the longer-term effects of events on factors like growth and inflation. While reactions were negative at first, market normalization started taking place shortly thereafter.

    Inflation implications of Middle East tensions

    Oil prices surged amid the turmoil as investors speculated about potential supply disruptions. Lasting oil price spikes can have an enduring effect on growth and inflation by pushing up manufacturing and transportation costs. This can ignite inflation as consumers are forced to pay more to heat homes and fill their gas tanks. If these higher energy costs persist, manufacturers and retailers may eventually be forced to raise product and service prices to account for the higher input costs, casting a wider inflationary net.

    Focus on the longer-term economic fundamentals

    Investors would be wise to follow the market's lead, look beyond the headlines, and instead focus on the big picture. Employment strength and low inflation are likely to have a far greater overall effect on the trajectory of U.S. asset prices. Geopolitical risks—whether military, trade, or election-related—will come and go. Focusing on the big picture instead of fretting over the latest headlines may be an effective way for investors to help keep their portfolios on track over time.