Probabilities in 2020

Market Commentary – Winter 2020

When it is not in our power to follow what is true, we ought to follow what is most probable.” – René Descartes

The quote above from Descartes captures the dilemma and opportunity of investing based on a logical interpretation of present conditions.  In 2020 the average investor has access to unprecedented data concerning markets and individual securities.  While the quantity of data available has made the judgment of which sources to heed and which to ignore more difficult, experience and knowledge greatly assist in editing the landslide of facts and opinions down to those which assist us in guiding our clients through uncertain times.

After a buoyant 2019, we believe the probabilities favor continued good times and believe clients will be well served to invest accordingly.  Our outlook is rooted in the following developments.  First, we expect global economic activity to increase after a subdued 2019.  The world’s major central banks are in an accommodative mode.  Further, China is taking action to stimulate domestic demand through fiscal policy.  Add to this, progress in reducing trade tensions between the U.S and China as a positive.  In advanced economies, inventories have contracted setting up a rebound in manufacturing as a new restocking cycle commences.  Amid these positives it is difficult to be glum.

However, investors are not in the business of predicting the future so we must have some regard for risks to the downside.  As 2020 commences, new risks have emerged since the beginning of last year.  As 2019 began, a sharp winter equity sell-off left stocks trading at attractive prices.  The strong advance in 2019 renders stocks selling at elevated multiples and more vulnerable should the truth of the future deviate from our reading of the probabilities.

Inflation expectations will be a key factor in 2020.  Inflation has been consistently below the Fed’s target of 2%.  Rhetoric from the central bank suggests that realized or actual inflation will be allowed to rise significantly above 2% to 2.2% or 2.3% before they intervene to quell rising prices.  Should such inflation conditions arise, or surprise even further to the upside, bond and equity markets could be vulnerable.  On the other hand, the continuation of moribund inflation under present accommodative conditions could increase the likelihood that bubbles could emerge in risk assets like stocks.

Today it makes sense to stay substantially invested in equities near the strategic allocation of a managed account.  Taking some money from fully valued U.S. equities in favor of international markets makes sense if, as we believe, global growth will accelerate.  If concerns surrounding inflation are realized, then an allocation to inflation sensitive assets such as TIPS and commodities and could serve as protective hedges.

We hope you had an enjoyable Holiday Season. We appreciate your trust and look forward to talking with you in the new year.

The Altavista Investment Team – Winter 2020


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