Investment Strategy 2020 Market Outlook

Investment Strategy 2020 Market Outlook

2020 Market Outlook 
S&P 500 Price Target: 3,400
S&P 500 EPS Target: $176 
Neurotic Nirvana 
Facts are what the facts are: the S&P 500 Index has posted positive returns 8 out of the past 11 years 
since this bull market began. While this period includes our assumption that stocks will hold onto their 
gains as 2019 concludes, it sure does not feel like US equities have been averaging roughly 15% annual 
returns since 2009. This “pain” and “doubt” is especially evident when considering the secular fee 
compression and poor performance facing institutional money managers. In addition, the months of May 
and August in 2019 clearly crippled investors into being controlled once again by rhetoric, fear, 
innuendo and momentum versus process, discipline, patience and common sense, in our view. Yet, the 
S&P 500 still managed to post several new record highs following those hiccups, while also helping to 
pace global equities more recently. To be sure, all-time highs have been wrestling with investor 
neurosis for the past 10 years – with no end in sight for either, in our view. 
So as we have liked to say lately, welcome to the second half of the bull market. 
We made a prediction in 2010, that US stocks were likely entering a 20-year secular bull market. We are 
sticking with that call. To be clear, we are not maintaining our longer-term bullish position to be 
stubborn. Rather, many of the same core principles remain in place – namely, US corporate superiority in 
terms of earnings stability, cash flow, innovation, product and services, and company management. 
Granted, a 15% annual return akin to the first 10 years of the bull will undoubtedly be more difficult to 
match considering that emerging markets, Europe and commodities will likely come into favor again at 
some point. However, we believe that a leadership shift that many investors have been hoping and 
praying for is at least a few years away. There just is not enough believability in the US yet – even after 
the performance of the past 10 years. Furthermore, as the market heads toward 2020, we believe there 
are at least three points that will only make the neurosis louder: 
1. Analysis paralysis – We believe there remains too much focus on macro and quant investing.
 Inverted yield curve mania defined pre-conceived negativity in 2019 – will the opposite
(inflation concerns and/or higher rates) take over in 2020?
 False signals in the ISM and PMI are more about crippled corporate psychology than a
looming recession – especially since manufacturing is only 20% of the US economy and a
presumed trade truce (or mini-deal) will significantly improve corporate and investor
psyche, in our view. Furthermore, we believe the deep desire to define the investment
cycle as early, mid, or late, is laced with academia practices that have largely not worked
for the majority of the current bull market.
 Overreliance on quant models have become a “defense mechanism” by many investors
that would rather “blame the model“ for being wrong relative to doing the work
themselves, let alone default to good old-fashioned bottom up stock picking, in our view.
2. Lack of Perspective – We believe momentum and “short-termism” has taken over for longer-

term patience and process as many investors guard against being wrong or “missing it.”

 Reacting to tweets and bullet point headlines instead of just staying invested has hurt 
returns.
 Historically low earnings estimate dispersions is an issue and is hurting the efficacy of 
analysis (no differentiation).
 Limited “market veteran” analyst and portfolio manager tenures (i.e., those in the role for 
more than 10 years) means that many investment professionals began their careers 
during a once in every other generation event (2008 crisis) and are “programmed” to be 
negative, cynical, too macro and non-reliant on fundamentals, in our view.
3. Election Focus – Too much credit or negativity is being placed on politics.
 There is no doubt that politics can either detract or enhance the underlying trend of the 
stock market and economy. However, fundamentals drive absolute performance. Granted, 
US Presidential election cycles are important and topical (see pages 28-29).
 Prognostications of corrections exceeding 20% (which constitute a bear market) are more 
about creating headlines than reality, in our view.
 The last time a US President was partially impeached was 1998 – when the S&P 500 Index 
was up 27%.
To mute this noise, here are three guideposts for 2020 that investors should consider:
1. DDA = Dollar Denominated Assets 
 Zero and negative rates around the world will continue to drive inflows in US bonds.
 The US dollar remains the world’s reserve currency, which has only been exasperated by 
Brexit (↓sterling) and negative rates (↓euro, ↓yen).
 High single-digit, stable earnings growth during a period of continued low interest rates 
and 17-19x multiples relative to ever increasing volatile global equities make US stocks an 
admittedly reluctant destination for most global investors to be, in our view.
2. 1990s Hip Hop – The Notorious B.I.G., Tupac and Snoop and the 1995-1997 stock market 
 Many believe the height of 1990s hip hop was 1995 to 1997, an era that helped define 
popular music and culture for years to come. We believe the same can be said to a large 
degree for equity markets:
 The Federal Reserve’s pivot in November 1994 (e.g., cut interest rates in 1995);
 Ushered in a goldilocks period defined by low rates, steady growth and US large 
cap quality stock outperformance.
 We believe a similar environment is currently under way:
 The Federal Reserve’s pivot in January 2019 ushered in three 25 bps cuts;
 US large cap, high quality, brand name companies are setting the pace for global 
stock market performance once again.
 2020 Base Case – The Notorious Bull Market Continues:
 With the Fed likely on hold through the election;
 Phase one tariff deal eases investor strife;

Investment Strategy 2020 Market Outlook