After a stronger 2019 than most expected, stock markets bears are now looking for reasons to be miserable about 2020.
A number of gloomy predictions have emerged in the past week suggesting that the winning streak of this year cannot continue. In particular, there’s a sense that US shares are due a reversal. That matters to most investors because American companies take up such a large share of the global market.
In its quarterly review of markets the Bank for International Settlements - or BIS, a sort of central bank for central banks - fretted that US shares were now overvalued, but made to look cheaper only in comparison to a distorted bond market.
The BIS went on to identify a recent ruction in the highly technical (and obscure) world of overnight institutional borrowing as evidence that all is not completely normal in financial markets.
Perhaps easier for non-specialists to understand was the round-up of Wall Street strategist forecasts compiled by Bloomberg. In aggregate, strategists predicted a 4% gain for the S&P 500 next year. As Bloomberg points out, this in fact represents a very cautious outlook from a group that can usually be relied on to produce only sunny predictions.
“We see the market already pricing in a strong rebound in macro and earnings growth, back up to the peaks of this cycle, much stronger than we expect,” Binky Chadha, chief global strategist at Deutsche Bank, is quoted as saying. In other words, much of the good news is already priced into US shares.
The S&P 500 continues to hover near all-time highs so some caution about the immediate future is to be expected. In fact, it’s a good time to reflect on exactly what a year 2019 has been for investors in America. After the close last week, the S&P 500 sat on a 25% gain for the year-to-date. That’s helped by the timing of the recovery, which began almost exactly as the calendar year began, but bear in mind that the index is also 35% higher than its December 2018 low.
From that elevated level, some profit-taking is to be expected.
Not everyone is so gloomy, of course. Fidelity Personal Investing recently gathered together three fund managers to look ahead to next year. James Thomson, manager of the Rathbone Global Opportunities Fund, explained how he expected the US to once again lead stock markets higher.
“Everyone keeps telling the US won’t outperform this year and yet it does, year after year”, he said. “I think US equities will do it again. Despite the ugly politics, the US will make us money because that’s where the growth is. US companies are growing profits four times faster than the rest of the developed world. That’s been true for the last 15 years. Some advantages are permanent. There are simply some world beating, innovative, resilient rock star companies that the rest of the world doesn’t have, and probably never will.”
For what it’s worth, I’m very happy to see some pessimism injected into the discussion about stock markets next year. The real signal to batten down the hatches would be a slew of wholly positive predictions, with no obstacles to returns identified. That’s when I’d really worry.
Five year performance
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Source: FE, as at 9.12.19, in local currency terms with income reinvested
Important information: The value of investments and the income from them can go down as well as up, so you may get back less than you invest. Investors should note that the views expressed may no longer be current and may have already been acted upon. Overseas investments will be affected by movements in currency exchange rates. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to an authorised financial adviser.
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