The more I go through my usual paces of charting, data analysis and interpreting the latest news, the more I continue to see the same things clamor for attention. You see, at any point in a market cycle, there are some price trends or patterns that simply scream “look at me.” Sort of like a spoiled kid…or actor…or politician.So, here is a quick review of what is yelling at me to pay attention to it as the new year gets underway.
I will do a deeper dive into this in an upcoming article. But for now, understand that tech stocks are the difference between a nice, easy bull market cycle (which we had from 2009-2016) and the FOMO-filled, Dot-Com-like, hubris-inducing, sugar-high-sentiment market we have had for the past 3 years.A strong economy and low unemployment are a big part of it. But so is an extension of easy-money policies in the U.S. and other developed nations. This is all fun and games until confidence breaks. When it does, you will see tech’s amazing advantage reverse itself. Until then, enjoy the ride, but keep your seat belt on.
Of the 11 S&P 500 sectors, this was the only one that did not return 20% in 2019. It was up less than half that. There are reasons for this. However, there is also a strong component of buying power on Wall Street that likes a deal. I see demand for all types of energy stocks (drillers, transporters, etc.) picking up. This is despite some pretty weak balance sheets among the non-blue chip companies.However, that is not the focus of the stock and bond markets right now. Middle East tensions are. Add on the “contrarian” potential for energy equities in 2020 and you have a story to watch.
The most commonly-cited U.S. Bond Index, the Barclays Aggregate, had a nice year in 2019. It was up about 8.5%. But that may have been the last gasp for bond investors. After all, the AGG only yields 2.7%, so there is not much room for yields to drop and prices to appreciate further.I have been singing this tune, that bonds are an overused asset class for most investors, since about 2012. The AGG has return 2.66% a year since that time. So even if yields don’t change much from here, and a credit crisis is pushed off for a while longer, that 2-3% annual return is not going to fund many retirements. Best to use bonds tactically, not as a portfolio anchor.
Of all the Dot-Com Bubble era similarities I have found, this one might be the freakiest. The Bloomberg Commodities Index is currently around the same level it sat in 1999. In that year, commodity prices finally started to climb after years of declines. It is way to early to make a direct comparison beyond that coincidence.However, there are growing signs that metals and agricultural commodity prices as well as that of energy are poised to climb. This could produce a market environment much more like the early 2000’s than the one we have had the past several years. That, in turn, will prompt us to look in some areas we have not taken seriously for a while. Like commodities.
Finishing up the list, and following that same theme, is the state of the currency market. As the chart above shows, the performance of the U.S. Dollar versus a trade-weighted basket of foreign currencies had a strong run in 2014-2015, and again in 2018-2019.However, as the debt bubble grows and D.C. stagnates, the Dollar appears to be topping. So, whether its non-U.S. stocks or bonds, investments in currency themselves, or some other form of financial strategy, this is another one of those potential sea-changes to keep front of mind in 2020.The bottom-line for 2020 is that investors may finally benefit from diversification away from tech-heavy stock portfolios. That could be a nice feeling for those investors who, by nature, tend to tread lightly on that low-yield, high-volatility segment of the global investment markets.