As Thanksgiving Day approaches and families gather together to experience real gratitude, it is also time to start planning and positioning for 2020. Credit spreads have been relatively stable to start the fourth quarter — a welcome reprieve from the market volatility that has been present since the fourth quarter of 2018. The two main drivers of risk sentiment over the past year have been Federal Reserve (Fed) policy and the U.S. trade dispute with China. With the Fed data-dependent after their recent “insurance” cuts and expectations of a potential signing of a phase-one trade deal, these two issues should no longer be the incremental source and driver of risk sentiment. The latter, in particular, has become a permanent feature of market reality, and notwithstanding any type of near-term truce, it’s evident the issues with China will persist for a while. As such, I think the primary source of volatility in the markets will switch to the domestic political realm as the Democratic primaries kick off in February.
Typically politics and policy, outside of sector-specific regulation, do not drive market performance. I think 2020 will be an exception if Elizabeth Warren or Bernie Sanders secures the Democratic nomination. Regardless, if either should win the general election, and independent of any opinions about their policy agenda, I think it’s safe to say that some of their proposals would create uncertainty in the market. A good showing by Joe Biden, on the other hand, would be a stabilizing force for risk assets, as he presents a less disruptive set of policy proposals. As the chart indicates, Warren, Sanders and Buttigieg are polling very well in the first two Democratic primaries, and there is a possibility that Biden might finish third or fourth in both. This would impact fundraising efforts and momentum, and the market will take notice.
Key Takeaway
I haven’t had 20/20 vision since I was 18, but I’m hoping my outlook for 2020 will offer more clarity. I have a constructive view on credit, given expectations for 1.5%-2.25% GDP, inflation and 10-year Treasury rates. Couple this with robust equity valuations, slowing but positive earnings growth and receptive capital markets, I forecast mid-single-digit (below coupon-like) returns for the high yield market in the coming year. This would be a combination of modestly tighter spreads and modestly higher Treasury rates. Moreover, since I think politics will likely dominate the narrative in 2020 and could cause some fireworks in the first quarter with a Warren or Sanders victory in Iowa and New Hampshire, I would buy opportunistically on any politically driven volatility.
The material provided here is for informational use only. The views expressed are those of the author, and do not necessarily reflect the views of Penn Mutual Asset Management.
This material is for informational use only. The views expressed are those of the author, and do not necessarily reflect the views of Penn Mutual Asset Management. This material is not intended to be relied upon as a forecast, research or investment advice, and it is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy.
Opinions and statements of financial market trends that are based on current market conditions constitute judgment of the author and are subject to change without notice. The information and opinions contained in this material are derived from sources deemed to be reliable but should not be assumed to be accurate or complete. Statements that reflect projections or expectations of future financial or economic performance of the markets may be considered forward-looking statements. Actual results may differ significantly. Any forecasts contained in this material are based on various estimates and assumptions, and there can be no assurance that such estimates or assumptions will prove accurate.
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