Via Financial Times

The US equity and bond rally that everyone hates will continue in 2020. That is the verdict from some of the biggest strategists and investors on Wall Street.

These market-watchers also forecast modest profits in US investment-grade corporate debt and high-yield junk bonds. Aside from the 2020 presidential election, they are bracing for slowing economic growth coupled with inflationary pressures, which could mean rising volatility in financial markets.

Here are edited excerpts from our interviews and questionnaires.

Greg Peters, head of multi-sector and strategy at PGIM Fixed Income in New York

“I see the 10-year Treasury yield [currently 1.9 per cent] at 1.60 per cent . . . I am buying triple-C credit in the high-yield junk bond market, triple-A CLOs (collateralised loan obligations) and triple-B corporate bonds.

“An inflation breakout would worry me. But ultimately, any move higher in real rates is negative for risk assets. So a rise in real rates is my focus point. I think political risk is somewhat overblown.

“A [Democratic] candidate with a more leftist lean would be taken negatively by the markets — less business-favourable backdrop, higher taxes, etc. However, unless you believe the Senate flips, I don’t see the markets completely freaking out.”

Rebecca Patterson, former New York-based chief investment officer of Bessemer Trust (Since this interview, Ms Patterson has announced a move to Bridgewater Associates, the world’s biggest hedge fund, as senior investor)

“For the S&P 500, we think a target for 2020 of 3,300 is reasonable [currently 3,221]. This assumes steady multiples and decent, albeit not very exciting, earnings growth.

“We are entering 2020 holding the same portfolio tilts we have had throughout 2019. Within equities, we have a bias towards the US, and from a style perspective, towards growth and quality, though we marginally added more cyclical exposure this fall to hedge ourselves should a global recovery prove more meaningful than we expect. With volatility so low, we are also seeing compelling opportunities in equity derivatives, rather than holding all our equity exposure outright.

“We are positioned well for a ‘muddle through’ 2020 or even a slower global growth backdrop. What worries me the most is the scenario in which we have a slowdown that evolves into a modest recession at a time in which central banks have very little room to provide offsetting support and governments are not in agreement over how much or what kind of fiscal stimulus to provide.”

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What might you do differently when the Democratic nominee is known? 

“One thing we will not do is overreact. History and common sense tell us that what is said during campaigns is not necessarily what will happen after an election.”

Richard Bernstein, chief executive officer and chief investment officer at Richard Bernstein Advisors in New York

“Our portfolios are positioned for a continued slowdown in US corporate profits as we are overweight consumer staples, healthcare, utilities, large-cap, and high quality and acceleration in China, primarily consumer cyclicals. We have sizeable positions in TIPS (Treasury inflation-protected securities) as well.

“Our biggest fear is that the US economy demonstrably improves with no inflation and US markets outperform non-US. In other words, a complete repeat of 2019 would hurt our performance.”

What will you do differently once we know who the Democratic nominee is?

“I think investors need to calm down. First, if one is concerned about a leftwing presidential candidate, then one should consider whether the Senate will flip from Republican to Democratic control. That seems unlikely. Second, it’s still very early.”

Scott Minerd, global chief investment officer of Guggenheim Partners in Santa Monica, California

“I see 3,500 on the S&P 500, at a minimum. More interesting is the Nasdaq, which I see at 10,000, at a minimum. The yield on the 10-year Treasury can hit 2.40 per cent . . . I’m buying high-quality corporates and credit.” 

What worries you the most? 

“No doubt, the highly leveraged corporate credit market. There is more corporate debt than ever on the books. A fallen angel scenario is concerning.”

Mark Grant, chief global strategist at B Riley FBR Inc in Fort Lauderdale, Florida

“My target for the S&P 500 by year end is 3,382 and the 10-year yield at 1.70 per cent . . . The best sector for yield is closed-end funds with monthly dividends. Double-digit yields can still be found here. I think that double-digit yields will outperform the equity markets next year.”

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“I am quite concerned about the impeachment process and also negatively yielding debt . . . I think that any of the Democratic candidates for president, if elected, will have a negative impact upon the equity markets.”

Ashish Shah, co-chief investment officer of fixed income at Goldman Sachs Asset Management in New York

“We see global growth stabilising and an accommodative Fed. Markets are pricing some of that already, so returns on stocks and bonds should be positive but muted. I’m an investor, not someone who can predict the future, so I will try to own some of the best of both.”

“We think investors have been too pessimistic on global growth, so we are buying high-yield and EM (emerging markets) that will benefit. Investors have had a good year and are playing defence into year end. That will change as we hit January 1.”

What worries you the most?

“Investors are desperate for returns and that can create ‘mis-valuations’ in different markets. I worry about imbalances developing. If you look at the past two years, people have continued to chase whatever has worked over the prior 12 to 36 months, leading to crowded trades and vicious reversals.

“We think many individual investors have been shortening the true duration of their portfolios as they seek more returns. That will be a mistake when there is actually a recession. Bonds protect your portfolio in downturns. They are your friend. We all need more friends.”

David Lafferty, chief market strategist at Natixis Investment Managers in Boston

“We see 2 per cent on the US Treasury 10-year yield. We expect rates to wander slightly higher, but with some of the highest yields already in the developed world, there is relentless pressure to keep rates from rising too much. Above 2.25 per cent seems unsustainable. 

“We see 3,300 on the S&P. We expect stocks to grind higher on earnings growth, which will be closer to 4 to 6 per cent than the current 10 per cent bottom-up consensus. This combination argues for mid-single digit returns, assuming economic growth doesn’t falter.”

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What are you buying into 2020?

“Healthcare and financials, the two cheapest areas of the market. Political fears around ‘Medicare for All’ are overblown and banks are already priced for extinction — which is unlikely to occur.”

Kristina Hooper, New York-based chief global market strategist at Invesco 

What are your predictions? 

“The S&P 500 at 3,100 and the 10-year Treasury yield between 1.9 per cent and 2 per cent. I am more positive on stocks than I am on the overall economy, given the significant central bank stimulus we are seeing.”

What worries you the most?

“In the long term, I am worried about the rise in government debt. A more immediate concern is the trade situation, given that we are seeing a rise in protectionism. That will only be exacerbated by the hobbling of the WTO (World Trade Organization).

What will you do differently once we know who the Democratic nominee is?

“Absolutely nothing.”

What’s the one asset you would like to buy more of?

“Chinese stocks. I am confident China will pour enough stimulus into its economy. That, combined with its focus on opening up Chinese financial markets, should ultimately push Chinese stocks significantly higher.” 

Jim Paulsen, chief investment strategist at The Leuthold Group in Minneapolis

“My targets are 3,550 on the S&P and 2.6 per cent on the 10-year Treasury note yield.”

What are you buying into 2020? 

“Small-caps, international including EM and cyclical sectors. Also, I continue to overweight in small-cap tech shares.”

What worries you the most? 

“That overheat and inflation pressures come back more quickly next year than I expect.”

Ankur Crawford, portfolio manager at Alger in New York

“We believe US equity markets should enjoy another positive year in 2020, somewhere between 7 to 10 per cent at some point during the year, due to a potential acceleration in global growth. The resulting economic growth likely causes 10-year Treasury yields to potentially get closer to 2.5 per cent.”

“Three things worry us: a sudden rise in interest rates, inflation and central bank tightening.”