Markets will continue to be up in 2020, but there will be heightened risks, including a 50% chance of a recession, John Hancock Investment officials said yesterday.
The economy and the market seem “awesome“ right now but watch the Fed, the consumer, jobs creation numbers and be ready to hedge your bets in 2020 because there’s the possibility of recession, they said.
Hancock officials said the economy is in a low-growth world and this has significant implications for the financial markets. Matthew Miskin, Hancock co-chief investment strategist, said consumer staples, technology and health care are among Hancock’s big bets as growth in the markets next year will likely be in the single digits. He estimated the S&P 500 will be up about 5% next year, but he added the chance of a recession will be “50/50.”
Much depends, he argued, on whether the central bank continues its interest rates cuts and if Fed officials believe they still have the capability to add more to their expanding balance sheets. Several cuts are important because the central bank is virtually committed to a second round of quantitative easing, he added.
Another Hancock strategist said trying to predict a recession is a dicey proposition.
“We are still positive, but we are hanging on by a thread,” said Emily R. Roland, co-chief investment strategist with Hancock. But she stressed that it is difficult to call a recession just because some of the economic data recently started “to look less worse.” She added, “Our best case is for a muddle-through economy that is positive.”
How does one invest in this kind of environment?
Miskin said the Hancock is overweighing technology stocks because “we believe we are in a low-growth world and earnings growth is moderate.” That is the best environment for technology. By contrast, he said health-care companies have taken a beating, which he called “our biggest mistake,” owing to political currents. However, he added that health-care companies are starting to recover. Other favorites, he added, include consumer staples and utilities.
“We do like certain defensive parts of a market as a protection if is there is a trade war regime. We are trying to organize our portfolio to invest around that,” he said. Miskin is a bull on bonds, which he said have benefited from the Fed’s recent rate cuts. His typical allocation is 60% stocks, 40% bonds.
He said many investors should put more into bonds “because there is so much cash on the sidelines. Moving into fixed income could act as ballast for equities.” Miskin said quality corporate bonds are his preferred fixed-income investment.
In both stocks and bonds, “our number one call is for quality.” he said. "That means companies with small ratios of debt to equity.” Hancock’s theme in a slow-growth market is “participate on the upside but protect on the downside. That is going to be our motto going into 2020.”
A key issue for preventing the recession is the consumer, the strategists said. Will he or she continue to feel good because there is little joblessness and so will he or she continue to spend ? Roland asked.
“The consumer is the workhorse of the economy,” she added.
A possible recession warning sign, she added, is if job creation numbers and unemployment insurance claims are suddenly bad.
Another factor is global disinflation, which, if it continues, will give the Fed the leave “to continue to cut rates,” she said. That will help the economy by keeping the expansion going and giving investors confidence in the dollar, she said.