Expect a Year of Moderate Gains, Ally Invest Strategist Says

Kiplinger: What do you see ahead for stocks in 2020? I believe the bull market will reach its 11th birthday in March, but the magnitude of the gains will be keenly dependent on trade policy. For businesses to feel more confident and keep spending, we need a clear path to a resolution there. I don’t think 2020 will be another double-digit year for returns. But I think stocks could still see a price increase in the low- to mid-single-digit percentages.

What’s supporting stocks? I believe economic growth will improve throughout the year. The pickup will come from lower rates. They’ll stay low for quite a while, even if there is a tick up by a quarter point or so late in the year. That will be a benefit to an already strong consumer. Corporations have been dealing with tariffs for more than a year—this is becoming a new normal. Because of that, companies are spending money to reroute supply chains all around the world, and that will be a benefit in 2020.

Where should investors put their money now? Value-priced stocks have taken the reins from growth-oriented stocks. While investors recalibrate and truly come to believe that economic growth will accelerate, they’ll take advantage of value stocks—which are often the ones that see the biggest boost from an improved economy. Later in the year, however, you could see growth retake the reins.

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Why is that? Economic uncertainty due to the election could drive investors to the old standby. Plus, look around the world. It’s becoming more digitally connected, especially in the U.S. Not just iPhones or computers and laptops, but your car, your house, industrial and health care companies—everyone is moving in that wave. This is leading to greater earnings increases in growth sectors than in value, making it difficult for investors to avoid those greater growth opportunities. I believe you’ll see growth return to favor by the second quarter or so.

So, you recommend technology stocks? Yes, tech and communication services.

What else do you like? I still feel confident in the U.S. consumer. We’re getting to a point where employers are complaining about their ability to find qualified workers. Employers will have to either pay up or offer programs to train and educate the current workforce to fill those jobs. In a period of consumer strength, I see another leg up for consumer discretionary—stocks of companies that make nonessential consumer goods. But you have to dig in and look at where consumers are actually spending money. I like homebuilders, restaurants, certain hotel and travel companies, and some retailers.

How will the election impact the market? Political risk is going to be heightened in 2020. You might see some trends that are not normal, historically. A key factor is who the Democratic candidate will be—that’s going to drive a lot of angst in the market. If it’s a very liberal nominee, you could see the financial, health care or energy sectors underperform going into the election—usually, energy and financials are among the better performers. Consumer staples and utilities should maintain their historic trend of outperforming. I think that tech and communication services stocks (which have historically underperformed, pre-election) can do well, even with the threat of regulation hanging over them. I’d be surprised if any regulatory legislation got through Congress in an election year.

What other portfolio moves should people be thinking about? Small- and mid-cap stocks may perform better in 2020. Lower interest rates and improving economic growth will benefit those sectors, as will an increased appetite for risk from investors in an improving economic environment. You still want significant exposure to the domestic economy, but having some exposure to emerging markets could benefit your portfolio in 2020. I would consider a broad indexed approach.

What are the big risks in 2020? One risk factor that doesn’t get talked about enough is government debt. National debt in the U.S. just keeps rising, and the government continues to increase budget deficits without focusing on cutting spending. We haven’t been fiscally responsible.