If there was still a flicker of doubt whether the Federal Reserve would keep rates on hold this week, it was extinguished by Friday’s jobs data. With non-farm payrolls adding 266,000 – a ten-month high – and hourly earnings rising only 0.2%, the U.S. central bank can confidently stick to the script rolled out since rate-setters sliced 25 basis points off the Federal Funds rate in October.

The pause should let American investors focus fully on preparations for the holiday season, leaving any portfolio adjustments until the new year. “Strong payroll numbers and weak wage growth is the best of both worlds,” says Nela Richardson, investment strategist at Edward Jones. “The Fed looks smart.”

Nevertheless, financial advisors and their clients will have much to ponder when they re-set their investment strategies for 2020 – on both domestic and international fronts. JP Morgan Asset Management global market strategist Jack Manley advocates remaining overweight in equities. “There is no alternative,” he says, in the current interest-rate environment, but he also argues for a fixed-income allocation focused on duration as a ‘set-it-and-forget-it’ insurance policy. “When the downturn comes, it’ll do what it’s supposed to do.”

On October 30, the Fed surprised no one by lowering its target rate to 1.50-1.75%. This completed a three-stage loosening of monetary policy, started in July, which follows a well-established playbook used three times in the 1990s under Alan Greenspan. Subsequent commentary has reinforced expectations that the Fed considers three consecutive cuts sufficient to ward off a sharp slowdown.

“We’re still seeing a rise in nationalism and protectionism, which is not good for the global or the domestic U.S. economy.”
Scott Brown
Raymond James
Fed Chairman Jerome Powell said the U.S. economy had proved “resilient” to headwinds and only a “material reassessment” of the economic outlook would prompt a re-think. Neither economic data nor political developments since October warrant a shift from Powell’s declaration of intent. With the Fed in ‘wait-and-see’ mode – which some expect to last well into the 2020 electoral cycle – can investors also afford to sit back?

Despite the Fed’s intervention, it is still a mixed picture for the U.S. economy, with consumer spending picking up the slack as business activity continues to be weighed down by an uncertain global outlook – largely driven by protracted U.S.-China trade discussions. This division was seen starkly in Q3 2019 GDP data, with a revised growth rate of 2.1% largely delivered by consumers, albeit with business investment shrinking less than previously estimated.

December 15 could be a red-letter day for investors as this is when tariffs are due to be imposed on Chinese imports worth $156 billion, including consumer items such as mobile phones, laptops and clothing. If no ‘phase one’ deal is reached and new tariffs are introduced, business investment could be delayed further and the prospects for both U.S. and international equities could weaken. “We can expect a little anxiety before December 15 and a little queasiness afterwards,” says Richardson, if no deal materializes.

But few, if any, are expecting a recession in 2020. Nevertheless, a new year reappraisal is always prudent, especially after a year in which equity returns have been so strong. As Manley notes, “After 11 years, we’re clearly closer to the end of this expansion cycle than the beginning.” Overweight equities may still be the only game in town but advisors should prepare for bumps in the road that may jolt in 2020.

Michael Turvey, senior strategist, Institutional Trading Education, TD Ameritrade, says advisors might want to rein in investor exposure to 2019’s biggest success stories. “Most sectors went up in line with the S&P, but investors may want to check their exposures to over-performing sectors, such as technology,” says Turvey, suggesting innovative healthcare stocks might be worth exploring in 2020.

A falling dollar could also prompt investors to look beyond U.S. borders, Turvey suggests. “U.S. investors tend to have a strong home-field bias and international stocks have certainly under-performed for a number of years. But a weakening dollar could mean it’s time to look again at emerging markets,” he notes.

Scott Brown, chief economist, Raymond James, also believes investors should think globally in 2020, suggesting emerging markets might be due a resurgence. Again, much may hang on the tone set by U.S.-China negotiations. “We’re still seeing a rise in nationalism and protectionism, which is not good for the global or the domestic U.S. economy,” says Brown.

Manley agrees there are good reasons for investors to adopt a somewhat cautious outlook for 2020, but says the interest-rate environment demands a focus on equities. This may mean favouring the balance sheet stability and earnings quality of large-cap stocks over smaller firms. It could also imply a tilt toward cyclical and value stocks, perhaps in the financial and energy sectors, where dividends may support overall returns.

More broadly, he posits that advisors should consider recommending a stronger and longer equity component to retiree portfolios than has been traditional. “Our overall approach to asset allocation is a little antiquated,” he argues. “That slide to 100% bonds doesn’t cut it when we’re living longer and have not saved enough for a long retirement. We have to take on more risk, and equity risk in particular.”