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2020 Outlook: Seek balance amid political and economic risk

• Investor patience is a virtue in volatile U.S. presidential election years.
• International stocks appear attractive on a company-by-company basis.
• Consider upgrading bond portfolios as rates stay lower for longer.

U.S. outlook: Maintain balance in this election year

Heading into 2020, there is little doubt that politics will dominate the news cycle. For investors, U.S. presidential elections often bring heightened market volatility, especially during the rough and-tumble primary season. Add that to the U.S.-China trade war, the U.K.’s Brexit drama, slowing global economic growth, civil unrest in Hong Kong, impeachment proceedings in Washington D.C., and you’ve got a classic “wall of worry” for markets to climb.

On the surface, the 2020 presidential election would appear to be a highly consequential event with major implications for the U.S. economy and markets, not to mention the rest of the world. However, history suggests that may not be the case. U.S. markets have consistently trended upward after presidential elections, rewarding patient investors — regardless of who occupies the White House.

“Presidents get far too much credit, and far too much blame, for the health of the U.S. economy and the state of the financial markets,” says Capital Group economist Darrell Spence. “There are many other variables that determine economic growth and market returns and, frankly, presidents have very little influence over them.”

“As we move into the new year, I think we will start to see some improvement in U.S. economic growth, helped along by easy monetary policy,” Spence continues. “But I don’t think the winner of the next election, whether it’s a Democrat or a Republican, will have much of an impact beyond the usual short-term market gyrations.”

International outlook: Consider a borderless approach

Investors who are worried about political risk in the U.S. might want to look overseas for a broader set of investment opportunities. Not because international stocks have any less political risk, but because the world has changed dramatically under the influence of free trade, global supply chains and the rapid growth of multinational corporations.

From an investment perspective, national borders are no longer as relevant as they used to be. Many companies headquartered in Europe, for instance, derive much of their revenue from the U.S., China or Latin America.

“Where a company gets its mail is not a good proxy anymore for where it does business,”

explains Rob Lovelace, a Capital Group portfolio manager.

Moreover, many of the best stocks each year are found outside the United States. If you look at individual companies instead of index returns, you’ll find that the companies with the highest annual returns each year were overwhelmingly located outside the U.S. In 2019, 44 of the top 50 stocks were based on foreign soil. Investors who opted not to go outside the U.S. missed a shot at those companies, many of which are small to mid-sized firms with potentially faster growth opportunities.

Fixed income outlook: Think about upgrading your bond portfolio

Over the past year, the bond market has reminded investors that not all is well with the global economy. Central banks around the world have cut interest rates aggressively in a bid to offset the negative effects of U.S.-China trade tensions, persistent deflationary pressures and slowing growth in China, Europe and elsewhere.

In the U.S., an inverted yield curve has suggested that a recession may be looming. In Europe and Japan, negative interest rates have spread like wildfire — with more than $15 trillion of bonds trading at negative yields. In such uncharted waters, investors would do well to upgrade their bond portfolios as a counterbalance against periods of equity market volatility, says Mike Gitlin, head of fixed income at Capital Group.

 “In an extraordinary market like this, balance is essential,” Gitlin stresses. “Amid unusual market trends and mixed economic indicators, a strong core bond allocation may be your best defense.”

2020 Outlook: Key takeaways

Stay balanced in an election year

• Patient investors can do well in election years. We looked at every election since 1932 and found that primary seasons are volatile, but markets have notched solid gains afterward.

• Recession in 2020? Not if the consumer stays this strong. In the U.S., consumer strength should continue to offset a manufacturing slowdown caused by trade uncertainty.

Consider upgrading your equity portfolio

• The best offense is a good defense. It’s not too soon to prepare portfolios for rougher seas as we face headwinds from an election year and a slowing global economy.

• Look for sustainable dividends, not just “value” stocks. The value label can be misleading; it’s not always defensive. Consider selecting companies with the potential to maintain dividend payments in tough times.

Think about upgrading your bond portfolio, too

• Consider revisiting your bond allocation. Given the late-cycle U.S. economy and weakness abroad, we think a fixed income allocation should be mostly core bonds that can help mitigate stock market volatility.

• Explore complementary assets to high-yield corporates. High-income munis and emerging markets bonds have offered similar after-tax income potential — often with lower correlation to equities.

Rob Lovelace is vice chairman of Capital Group as well as an equity portfolio manager. He has 33 years of investment experience, all at Capital. He holds a bachelor’s in geology from Princeton and is a CFA charterholder.

Darrell Spence is an economist and research director with 26 years of experience. He earned a bachelor’s degree in economics from Occidental College. and is a CFA charterholder.

Mike Gitlin is head of fixed income at Capital Group. He has 25 years of investment experience, four with Capital. Mike was previously the head of fixed income and global head of trading for T. Rowe Price. He holds a bachelor’s from Colgate University.

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