We continue to exercise caution despite the market making new highs and the excessive optimism shown by the market remains undaunted. 2020 did not begin on a good note, as China was hit with the Coronavirus and this has the potential to snowball into a black swan kind of event. The impact of the Coronavirus on the global economic outlook is tough to gauge, but as far as China is concerned, it could easily shave off 1-2% of the Chinese GDP growth this year. Also, this is an election year in the US, and I think after Super Tuesday in March, we could see investors pricing in a little more risk in the equity markets. It is widely anticipated that the Federal Reserve will continue to be dovish amidst increasing headwinds. It may even cut interest rates one more time this year, if the global impact from the Coronavirus worsens. But at this point in time, it seems best for the Federal Reserve is to stay the course and hold the rates at their current level.
Like I mentioned earlier, once we make some progress in the primaries, the stock market will start pricing in more risk depending upon the candidates. According to LPL research, historically equities (S&P 500) have done well if the President is up for reelection and is not a lame-duck president. Note that a “lame-duck president” means the sitting president either isn’t running for reelection or has already fulfilled the maximum two terms.
The S&P 500 is now trading at almost 19x forward P/E ratio, which is above the five-year and the ten-year average. The inflation expectations are little tempered and remains around/below 2% which keeps the outlook about a Goldilocks economy intact, for now. The sovereign yields around the world continue to be under pressure and the path of least resistance remains on the downside. Any weakness in the earnings growth, change in the outlook due to the Coronavirus and/or headline risks from the election, could lead to a swift pullback in equities from about 5 to 10%. This could again offer an attractive opportunity to get long at compelling valuations.
We will continue to monitor the financial market conditions and keep you abreast of further developments. If you still have further questions about your investments, please feel free to contact your Wealth Advisor at Marshall & Sterling Wealth Management.
Stock investing involves risk including loss of principal.
International investing involves special risks such as currency fluctuation and political instability and may not be suitable for all investors.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results.
The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful.
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