My Biggest Risk in 2020 – Dysfunctional U.S. Government
Last January, I wrote that my #1 risk to the stock market in 2019 was a dysfunctional U.S. government. It will be no surprise to any of you that my #1 risk to the stock market in 2020 is a dysfunctional U.S. government. You can’t say I haven’t been consistent in my predictions. I hope that portfolio returns will remain just as consistent into 2020. However, I don’t expect that hefty returns in 2019 will be repeated in 2020.
As I monitor markets, I haven’t uncovered any new major risks to your portfolio. The recent stock market rally has been driven by an expansion of multiples, which means that corporate profits have lagged the rise in stock prices. On a P/E basis, the chart below reveals that stock valuations are in-line with historical averages. Stocks are not cheap but there is value as long as corporate profits continue to rise.
It’s usually a combination of many factors that propel markets higher. A few reasons for the recent gains include the Trump administration signing phase 1 of the trade deal, corporate earnings coming in better than expected, low unemployment, and falling interest rates. We are also in the middle of a technological revolution that has been coined the fourth industrial revolution. I’ve written about this topic in past posts and I intend to write even more this year about AI, virtual reality, 5G, electric and self driving vehicles, quantum computing, cyber security, and the internet of things.
President Trump has also helped to launch stocks higher because of his pro-business friendly economic policies. They include cutting corporate taxes, deregulation, winning trade wars, speeding up drug approvals, and creating U.S. manufacturing jobs. He has also been the biggest cheerleader for the stock market tweeting about it constantly after every record setting close. Consumer confidence has soared because people are feeling rich and the job market continues to be strong. On the other hand, Democrats believe that his policies are sowing the seeds of destruction and are doing more harm than good. I try my best to keep politics out of it but the only risk that I see at the moment continues to be a dysfunctional U.S. government. Up to this point, the stock market has ignored the sideshow in Washington. I expect that the events that unfold in Washington this year will have the biggest implication to your portfolio. It could be President Trump making a bad decision or the Federal Reserve tightening monitory policy or an anti-business Democrat being elected president. I’m sure that you have your own strong opinions either way. My only objective is to help you achieve your goals and I try to leave politics out of it but it’s the politics inside of Washington that is the biggest risk to hindering corporate profits.
I continue to position portfolios into more value-oriented sectors but hold growth investments. Investors are starving for income and many dividend paying stocks in my opinion remain undervalued. At this stage of the economic cycle, I continue to favor equities over bonds. The playbook has been to own equities and keep a small allocation to bonds to stay diversified and be ready to buy on any dip. As always, I’ll keep you posted if my views change and I’m almost certain that my 2021 risk will be a dysfunctional U.S. government. 🙂
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