We held our 1Q-2020 investment strategy meeting on December 20, 2019. Following our meeting, we increased exposure slightly to both equities and fixed income due to the addition of several sector ETFs which we believe will benefit performance in 2020. We think the outlook for equities remains positive for 2020 although we think the probability for a modest correction sometime in Q1 has increased due to rising bullish sentiment. Within bonds, we continue to underweight longer duration as we believe rates will most likely rise in 2020.
We think the positive underpinnings for further gains in stocks in 2020 include improved earnings, low bond yields, and potential for higher valuation. A number of signs remain positive for the performance of the U.S. economy in 2020 which has positive implications for 2020 earnings. These include: strong consumer confidence and spending, low unemployment, a Phase 1 trade deal with China, accommodative Federal Reserve policy, and prospects for improved capital spending. We believe the recent agreement with China for Phase 1 of a trade deal has positive implications for the U.S. and the global economies which we believe could lead to increased business confidence, higher capital spending, and higher corporate earnings in 2020. Risks to our U.S. outlook would be a significant delay or unwinding of the recent Phase 1 trade deal with China, a jump in inflation (which we don’t expect), and Presidential politics.
Speaking of Presidential politics, so far the markets appear to be viewing the recent impeachment of President Trump as a non-starter. This is reflected in a rising stock market throughout the recent proceedings. We think the market currently believes 1) it is unlikely Trump gets convicted by the Senate; and 2) there is/will be little impact or change in Trump’s economic policies from his impeachment. This view could change significantly next year depending on the course of the Presidential campaign and/or continuance of impeachment proceedings.
We believe prospects for international stocks have improved due to the improved likelihood of a Phase 1 trade deal with China. We believe consummation of a trade deal would have a positive impact on the global economy. As a result of this improving outlook, we increased our allocation to international stocks by about 2.7%. We added a small position in emerging market stocks (JPEM) which we believe present a good value opportunity if the Phase 1 trade deal plays out successfully.
Within the fixed income area, we added two positions to increase income. We added a small position in preferred stocks (PFF, as a bond substitute), and added a position in mortgage-backed bonds (SPMB). Both positions offer a significantly higher yield than our core bond holdings, about 2.5x higher for PFF within long bonds, and about 60% higher for the SPMB within intermediate bonds.
We updated our investment action trigger, which is now an increase in the 10-Year U.S. Treasury bond yield to 2.75% (currently 1.93%), which would have negative implications for financial assets. This would imply that inflation and/or interest rates are rising much faster than we expect. Setting of action triggers allows us to 1) be proactive in managing portfolio risk and 2) think about risks in a more calm environment and not have to react under duress.
All of us at S. R. Schill & Associates send our best wishes for a happy holiday season and a healthy and prosperous 2020 !
Robert Toomey, CFA/CFP
Vice President, Research