OUTLOOK 2020 INVESTMENT STRATEGY GROUP - JANNEY MONTGOMERY SCOTT LLC
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INVESTMENT STRATEGY GROUP
OUTLOOK 2020
JANNEY MONTGOMERY SCOTT LLC
Published: December 18, 2019
I N V E S T M E N T S T R AT E G Y G R O U P
OUTLOOK 2020
We envision another year of positive economic growth and favorable markets, but correcting for
evolving uncertainties surrounding the election and geopolitics keeps us agile. Blurred by the
slowdown in global growth, ongoing trade tensions, and partisan political wrangling, investors face
issues that can be difficult to read. Our views should help to sharpen the focus on those that matter
as we score the evolution of trade, the global economy, and rates.
OVERVIEW
Equity Markets............................................................................................................................................................................ Pages: 3–6
• The expansion has extended into its record 11th year and the support for further growth, namely consumer spending, remains
in place. Our call is for no recession in 2020.
• A steady domestic backdrop and improving growth overseas should steepen the glide path for corporate earnings. Share
prices, in turn, should take their directional cue from rising profits.
• Foreign equities may prove generous for investors willing to venture internationally. Europe, Japan, and emerging market
equities should benefit from reflating global growth.
• Odds favor another strong year for equity returns, but policy risk via the upcoming election, and a fluid trade situation with
China and perhaps others, could upend our sanguine view.
Fixed Income and Interest Rates............................................................................................................................................ Pages: 7–8
• U.S. fixed income markets delivered exceptional returns in 2019, as interest rates declined and credit spreads remained well
behaved for the most part.
• The Federal Reserve will likely provide two to three more “insurance” rate cuts, which will help compress interest rates further,
but by a smaller margin than in 2019.
• We suggest a higher-quality and longer-in-duration bias for those seeking to limit overall portfolio volatility.
• We prefer longer-duration (10 to 15 years) high-grade municipals for those that benefit from tax-exempt income. We like least
the middle rungs of the high yield corporate sector.
Taxable Fixed Income..............................................................................................................................................................Pages: 9–10
• We anticipate the yield hunt of 2019 to persist, but warn investors against stretching for yield at the expense of their risk budgets.
• In our judgment, value exists in higher-rated corporate bonds, mortgage-backed securities, and selective emerging market
sovereign debt.
• Certificate of deposit (CD) ladders built inside of five years can help bolster returns above simply holding cash equivalents.
Municipal Markets....................................................................................................................................................................Pages: 11–12
• The recently stronger pace of municipal issuance should continue, with a larger share of bonds of the taxable variety coming
to market.
• The municipal market will be supported by a continuation of strong mutual fund and exchange-traded fund (ETF) inflows, as
investors attempt to maximize after-tax income.
• Steady municipal market credit conditions will persist as state and municipal revenues grow at a healthy pace. We are,
however, less comfortable about the higher education municipal bond sector.
WWW.JANNEY.COM • © JANNEY MONTGOMERY SCOTT LLC • MEMBER: NYSE, FINRA, SIPC • JANNEY OUTLOOK 2020 • REF: 191213A • PAGE 2
ECONOMY & EQUITY MARKETS
Deciphering the world in 2019 posed many challenges and frequently tested investors’
patience. Still, the markets climbed the proverbial wall of worry to all-time highs for stocks
and to generous gains for bonds.
Growth slowed around the globe, trade uncertainty prevailed all year, and investors’
anxiety about an aging bull market caused equities to react vigorously to the daily ebb
and flow of news headlines.
While the U.S. managed to run at a steady pace, albeit one that was slower than 2018,
more manufacturing-heavy economies were agitated by the deceleration in China’s
MARK LUSCHINI, CMT growth and consequent downshift in trade volumes. Yet, through it all, we remained
Chief Investment Strategist
positive. We carry that same sentiment into the New Year.
President and Chief
Investment Officer, Janney
Capital Management OPTIMISM REMAINS DESPITE Granted, the journey to recovery took a little
PRESSURES longer than expected, given the amount and
Mark Luschini serves as
method of stimulus applied.
Janney’s Chief Investment Overall, our optimism stems from a view that
Strategist and leads the
the growth slowdown is transitory and does Soft Data is Encouraging
Investment Strategy Group,
which sets the firm’s view on not signal the end of the longest economic
macroeconomics, as well as and bull market in history. “Hard” data, measuring actual economic
the equity and fixed income activity such as export volumes, capital
markets. In addition, Mark We highlighted in other reports that the goods orders or industrial production
is the President and Chief global slowdown was mostly contained to continue to be mixed-to-positive, but “soft”
Investment Officer of Janney the manufacturing sector and the factors data from surveys like purchasing managers’
Capital Management (JCM), that have exacerbated it—the Chinese
the asset management indices, readings on business or consumer
subsidiary of Janney
deleveraging campaign and escalations in sentiment, and plans for hiring, capital
Montgomery Scott. Under trade tensions—have all started to reverse expenditures, or growth expectations have
his leadership, JCM has course. We believe this should pave the way shown a persistent pattern of improvement.
delivered competitive results for a pickup in global growth and a clearer
across its suite of investment and brightening picture ahead. This is very encouraging because soft data’s
strategies and grown its leading properties make it a better indicator
assets under management The J.P. Morgan Global Manufacturing of what is to come, as opposed to hard data,
to more than $3.5 billion. Purchasing Managers’ Index (shown below) which is less timely and sometimes a tad stale
Mark has spent more than is a survey taken from companies worldwide by the time it is reported in the public domain.
thirty years in the investment and shows the direction of global activity in
industry. He draws on that
experience to speak on topics
the economically sensitive manufacturing Tailwind Globally from China
related to macroeconomics sector. After falling for more than a year,
and the financial markets the index has posted four consecutive The myriad measures taken by Chinese
at seminars, client events monthly gains with its recent reading back officials to reflate economic growth should
and conferences. He into expansionary territory. This, and other become a tailwind to global activity.
is frequently quoted in
corroborating evidence, leads us to believe
publications ranging from Typically, it takes some time to make its way
the worst of the global slowdown has past.
the Wall Street Journal to the global economy but recent reports
and Barron’s to the New on exports and new orders coming from
York Times and USA Today. Chart 1: JPM Global Manufacturing PMI
In addition, he regularly
countries that rely heavily on trade, in general,
appears in various media and China, specifically, are encouraging,
suggesting some traction is already occurring.
60
outlets including CNBC, Fox
Business News, Bloomberg
Television and Radio, and 55 Reviving growth in China, which is slowly
the Nightly Business Report. taking place, will have repercussions
Index
He has an undergraduate 50 throughout the rest of the world as Chinese
degree in Psychology and imports still drive the bulk of global trade.
an MBA in Finance from
Gannon University and 45
The U.S.-China trade skirmish, however, remains
holds the Chartered Market
Technician (CMT) designation
the biggest risk and the most unpredictable
from the Market Technicians
(Source: Janney Investment Strategy Group; JP Morgan)
variable in the global growth revival equation.
Association.
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The only certainty is that President Trump has made it clear Chart 2: U.S. Unemployment Rate
that he cares about his 2020 re-election prospects. If past
is prologue, his chances of winning are highly correlated to 12.0
the performance of the U.S. economy. Therefore, he has a 10.0
strong incentive to strike a deal with China, or at least not 8.0
escalate tensions further.
% Rate
6.0
4.0
Arguably, President Xi is similarly incented, not for re-
election purposes since he has been declared president
2.0
for life, but rather to maintain social stability and raise 0.0
1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018
China’s profile on the global stage as it “fights” with the U.S.
for hegemonic superiority. (Source: Janney Investment Strategy Group; JP Morgan)
POSITIVE DATA ENCOURAGING BUT NOT A SIGN • T
he household savings rate is elevated. Households
OF RECOVERY already have a large cushion insulating them from
unforeseen shocks. At approximately 8% of disposable
The improving soft data mentioned above is obviously income, it is especially lofty if we take into account the
good but it constitutes no more than an early sign of record level of American households’ net worth. That
a burgeoning turn, and is not in itself evidence of an figure today is more than 60% higher than the last peak
actual recovery. just before the Great Recession of 2008–2009.
For stock markets to march sustainably higher and perhaps
for yields to follow, we think investors will need to see Chart 3: U.S. Household Net Worth (Nominal USD)
material proof of a pickup in global growth. For this, the hard
120,000
data still needs to elicit a sustained pattern of improvement.
100,000
Global Equity Leadership Expected to Shift Away from U.S. 80,000
Million USD
60,000
As that day dawns, we expect global equity leadership to
40,000
shift away from the U.S. stock market. Cyclical sectors that
benefit from economic acceleration account for a larger 20,000
share of international stock indices. 0
1998 2003 2008 2013 2018
Export-oriented economies like Europe, Japan, and the (Source: Janney Investment Strategy Group; JP Morgan)
emerging markets will get a boost from the gravitational
pull emanating from the Middle Kingdom. That will be a tide
that raises all global equity boats, but returns in the U.S. • T
he consumer is in a position to re-lever. Consumer credit
stock market may well trail other bourses overseas. demand is rising, according to the Federal Reserve’s survey
of senior loan officers. Since household liquid assets are
U.S. Economy Likely to Continue Expansion quickly expanding and the household formation rate is
robust, consumption of durable goods (such as homes
Meanwhile, we believe the domestic economy is
and autos) should rise, especially in light of the large
exceedingly likely to expand for the next year and beyond.
decrease in borrowing costs. This is particularly true since
The reasons are many, with the most important being that
the household debt-to-assets ratio is at its lowest level
the American consumer is well endowed and expresses
since 1985 and debt-servicing costs only represent 9.7%
elevated confidence in his/her household situation.
of disposable income, the lowest share for nearly 40 years.
Consider the following:
Chart 4: U.S. Household Debt Service Ratio
• T
he outlook for household income is positive. The
unemployment rate is extraordinarily low (the lowest 14
since 1969) and job creation is occurring at a healthy 13
pace. Additionally, the rising employment-to-population
% of Disposable Income
12
ratio for prime-age workers is usually a precursor to 11
stronger wages. Also, the recent pickup in productivity 10
growth points to higher wage growth. 9
8
(Source: Janney Investment Strategy Group; JP Morgan)
WWW.JANNEY.COM • © JANNEY MONTGOMERY SCOTT LLC • MEMBER: NYSE, FINRA, SIPC • JANNEY OUTLOOK 2020 • REF: 191213A • PAGE 4
Corporate Sector Outlook Brighter EQUITY MARKETS
The corporate sector outlook should also brighten soon. In light of global growth in 2020, the following observations
express our central view that we will see a cyclical recovery:
Business investment during the past several years has led
to an increase in productivity, which will help to protect • G
lobal Equity Markets — Raise international and
margins against the pressure from higher wages. Eurozone equities in particular. Prepare to overweight
emerging markets, but not until the profit picture
Importantly, the stabilizing growth in China and its feedback and Chinese growth show more convincing signs of
to other countries should also help to bolster capital reacceleration.
spending, hiring, and compensation intentions of U.S.
multinationals. Business investment and the activity that it • S
ectors — Overweight financials and industrials relative to
engenders will only serve to amplify the trend otherwise interest-rate-sensitive industries such as utilities and REITs.
underwritten by the consumer.
• C
ommodities — Prepare to overweight upon evidence
of a rise in Chinese resource demand. We prefer oil and
GEOPOLITICAL UNCERTAINTY TO SUBSIDE industrial metals.
In sum, we expect policy uncertainty to begin to recede.
Our prognostication for the U.S. stock market’s path
The reasons include:
forward includes three potential outcomes, which emanate
1. Domestic constraints on both parties are forcing China from various economic scenarios that could unfold.
and the U.S. toward a trade détente.
We assign a likelihood to each to express our confidence
2. The risk of a no-deal Brexit is now marginal given the level for the outcome realized. This year, we skew
deal U.K. Prime Minister Boris Johnson has delivered decidedly bullish, which is indicative of our asymmetrical
and been agreed upon by British Parliament. confidence in the global reflation narrative we outlined.
3. Donald Trump, as the White House incumbent
(assuming the impeachment proceedings do not lead
to his departure from the presidency), has a reasonable
chance of being re-elected, at least given the numbers
he is currently polling, which the stock market would
view favorably.
Pockets of Political Risk Remain
A decline in policy risk will help foster a global economic
rebound via the reaction function of business leaders’
confidence in future levels of activity. However, pockets of
risk remain.
The Middle East remains a potential powder keg that could
ignite an unwelcome spike in oil prices.
The antics of Kim Jong Un of North Korea, have quieted
but are not inert.
Central bank policy, both here and elsewhere, is liberal
and few are contemplating tightening the monetary setting
anytime soon, but that could change if inflation emerges as
a byproduct of all this accommodation.
Finally, the election hosts candidates from the Democratic
Party whose policies, if enacted, could change the investment
climate in a way that market participants could view
negatively. The question that will be answered in the coming
state caucuses is whether the market will begin to reflect
those concerns upon the election outcome or leading into it,
once a picture of the likely Democratic nominee crystalizes.
For any or all of these reasons, our hedge is to avoid
dogma and instead nimbly shift our views in the event our
base case is undermined. Stay tuned.
WWW.JANNEY.COM • © JANNEY MONTGOMERY SCOTT LLC • MEMBER: NYSE, FINRA, SIPC • JANNEY OUTLOOK 2020 • REF: 191213A • PAGE 5VARIOUS ECONOMIC SCENARIOS AND PROBABLE OUTCOMES
S&P 500 is 3,085 at the time of this writing.
Scenario 1: FOMO-Induced Melt Up Scenario 2: Hard-Earned Gains
Bull markets are notorious for starting strong and finishing Steady, but lackluster, economic growth results in softening
fast. Therefore, if history at least rhymes, the rally has employment conditions, weakening confidence, and a
significantly more upside before reaching its “sell-by” date. muted pace of consumption. Growth abroad steadies,
but fails to reaccelerate leaving the business community
Catalyzing the advance are:
hesitant to expand.
1. Improved growth abroad
While the trade truce resolved some worries about
2. Sturdy domestic activity Sino-American relations, the lack of commitment to
3. Reduced geopolitical uncertainty an agreement on the secular issues keeps worries
4. The likelihood of a market-friendly outcome in the race simmering. A big, sustained advance is elusive but
to the White House positive growth, benign inflation, and an accommodative
5. Under-invested and under-performing investor monetary setting spurs share prices to a level
“fears of missing out” (FOMO) force sidelined cash into commensurate with mid-single-digit, year-over-year
the market. profit growth.
The confluence of these factors serves to increase risk Without the vigor in animal spirits, stocks grind higher
appetites and stocks rise smartly, producing another year of in a halting fashion. There is no distinct reason to
double-digit gains. Cyclicals and international equities are overweight or underweight cyclicals or defensives as
leading. The S&P 500 Index benefits from earnings growth they flip-flop from leaders to laggards through the year,
subsidized by a soft dollar, boosting multinationals’ profits and international equities spend another year behind
and some modest multiple expansion to reach 3,500. the pace car driven by the U.S. stock market.
For U.S. investors, the currency cross works to favor The dollar remains well bid, which weighs on the profitability
investment returns generated in the European, Japanese, of large-company foreign activities. The S&P 500 Index
and emerging market bourses. moves to 3,300.
Probability: 50% Probability: 40%
Scenario 3: Heightened Geopolitical Uncertainty BOTTOM LINE: ENSEMBLE FORECAST
There are budding signs the global economy is poised to
Trade tensions resurface as the progress the U.S. hoped to
improve. Many readings on both manufacturing and services-
achieve on matters such as intellectual property protection,
related activity have likely bottomed and the majority of central
market access, and competitive fairness, stalls.
banks around the world have turned the monetary spigot wide
The White House imposes tariffs on the tranche of imports open to stoke economic reflation.
that were previously deferred or excluded, and threatens
The presidential election leaves room for a market-unfriendly
higher tariffs on those goods upon which they were already
outcome should some of the candidates’ campaign-trail policy
imposed. The election campaign is difficult to handicap and
announcements make it to the White House and through
investors choose safety over bold predictions.
Congress. However, the incumbent may win and a split
Business confidence drops and along with it intentions to Congress could thwart the impact of legislative efforts.
hire, compensate, and spend, dim.
While the body of evidence points to a reacceleration in global
While China is successful in arresting its economic growth, the recovery is still embryonic, leaving it vulnerable
slowdown, the lack of a fresh catalyst to propel growth to a relapse should trade tensions re-escalate. Indeed, trade
leaves the world in economic stasis. between the U.S. and China remains the biggest global threat
to the economy and financial markets.
Monetary policy increasingly proves impotent and the lack
of a sizable and positive fiscal impulse from a systemically At the same time, not to be overlooked is the pressure applied
important country or economic bloc invites skepticism that to Iran by way of the sanctions imposed on its economy,
corporate profits can grow meaningfully. which could precipitate a draconian response and generate
a large risk premium in oil prices. These factors, and others
With somewhat demanding valuations in the stock market,
mentioned already, temper our most bullishly graded scenario,
and consensus earnings estimates slipping, a higher risk
but still leave meaningful upside for stocks. Accounting for
premium is warranted. Stocks are de-rated; defensives, gold,
the probabilities assigned to the scenarios presented, our
and cash outperform; and the S&P 500 Index falls to 2,600.
ensemble price target for the S&P 500 Index is 3,330.
Probability: 10%
WWW.JANNEY.COM • © JANNEY MONTGOMERY SCOTT LLC • MEMBER: NYSE, FINRA, SIPC • JANNEY OUTLOOK 2020 • REF: 191213A • PAGE 6FIXED INCOME AND INTEREST RATES
2019 was a banner year for U.S. fixed The most prominent plumbing issue emerges
income returns. from the coincidence of an inverted yield
curve (in foreign-exchange terms), heavy
Benchmark 10-year Treasury yields declined Treasury issuance, and banking regulations.
to 1.85% from 2.69% and credit spreads in
corporate bond markets contracted, putting Essentially, because of the presently high
a strong tailwind behind returns in nearly all cost of hedging U.S. dollar bonds into other
fixed income markets. For example, returns currencies, foreigners see longer-term yields
for investment-grade corporate bonds are as much lower in home currency terms.
running at the best pace since 2009, when
GUY LEBAS, CFA® markets were still recovering from the global Hedging cost encourages foreign buyers
Chief Fixed Income Strategist financial crisis. to purchase T-bills and lend into other
Director of Custom Fixed
short-term markets, such as repurchase
Income Solutions, Janney A number of factors boosted returns, not the agreements (repos), rather than buy longer
Capital Management least of which was fortunate timing, as the Treasuries. Heavy Treasury issuance then
beginning of 2019 followed a steep selloff in functionally requires U.S. banks to purchase
Guy LeBas is responsible
for providing direction to
risk assets. that issuance, funded by short-term repo
the firm’s clients on the loans from those foreigners.
macroeconomic, interest Chart 5: Fixed Income Returns Exceeded 5%
rate, and bond market in Every Major Sector YTD During the past four quarters, large U.S. banks
investing climate. have funded 25% of the U.S. budget deficit,
Guy authors bond Aggregate
buying $264 billion of Treasuries and counting.
market periodicals which
provide relative value
Finally, complex bank regulations that only
recommendations across
Treasury fully phase in 2019 functionally limit the
the fixed income spectrum. amount of Treasuries these banks can buy.
Bloomberg named him the MBS
most-accurate forecaster of
Chart 6: “Average” Foreign Treasury Buyer Sees
the Treasuries market in 2015 IG Corporate U.S. Yields Far Lower After Hedging Costs
and previously recognized
him as a “Bloomberg Best” 2.00%
HY Corporate
for his work in bond market
forecasting.
1.50%
IG Muni
Prior to joining Janney in
2006, Guy served as Interest
Leveraged -1.39%
Rate Risk Manager for U.S. Loan
1.00%
Trust’s bank asset and liability
portfolios, a role in which he 0% 5% 10% 15% 20% 0.50%
oversaw risk and return on
(Source: Janney Investment Strategy Group; Bloomberg/Barclays Indices; as of 12/5/2019)
an $11 billion balance sheet.
He received his education 0.00%
1D 3M 2Y 3Y 5Y 7Y 10Y
from Swarthmore College
and is a CFA Charterholder. MARKET PLUMBING ISSUES TO DRIVE (Source: Janney Investment Strategy Group; Bloomberg)
RATE DECISIONS
For 2020, we remain modestly bullish on MORE RATE CUTS ON THE WAY
the high-grade bond markets.
As bank balance sheets become
The story for the year will be a complicated encumbered with Treasuries, their ability to
one, with interest rates driven by issues lend to the private sector declines, financial
of market microstructure and plumbing conditions weaken, and the Fed will likely
rather than big macro themes such as find itself forced into further “insurance” rate
economic growth. Market plumbing issues cuts or even full-blown quantitative easing.
will likely force the Federal Reserve into
additional interest rate cuts as insurance The unintuitive point here is that Fed action
against weakening credit conditions. is not contingent on economic growth (which
We expect the Fed’s insurance will remains decent for this point in the cycle),
be successful in averting weakness in or even really weaker financial markets, but
investment-grade credits. rather on the threat of credit weakness.
WWW.JANNEY.COM • © JANNEY MONTGOMERY SCOTT LLC • MEMBER: NYSE, FINRA, SIPC • JANNEY OUTLOOK 2020 • REF: 191213A • PAGE 7Ironically, the action the Fed has taken to regain control In addition to these categories performing well in our
over repo rates makes it more likely they will be forced into favored interest-rate scenario, longer high-grade securities
more rate cuts in 2020. will also provide better protection against volatility in
equity-heavy portfolios.
FIXED INCOME RECOMMENDATIONS If we do face a bout of downside volatility in risk asset
Against this backdrop, our core recommendations for 2020 markets, gains in longer-duration high-grade assets will
are very much similar to those in 2019. absorb some of the downside and open up the opportunity
to reallocate into equity markets at a cheaper entry point.
We favor high-grade instruments with an intermediate-
to-longer (5 to 15 years) duration. This category includes
investment-grade credit, and especially for investors who
benefit from tax-exempt income, municipals.
Chart 7: Janney U.S. Interest Rate Forecasts
Central Bank Rates Current 4Q 2019 1Q 2020 2Q 2020 3Q 2020 4Q 2020 4Q 2021
Fed Funds Lower 1.50% 1.50% 1.50% 1.00% 0.75% 0.75% 0.75%
Fed Funds Upper 1.75% 1.75% 1.75% 1.25% 1.00% 1.00% 1.00%
Treasury Curve Current 4Q 2019 1Q 2020 2Q 2020 3Q 2020 4Q 2020 4Q 2021
3m Bill 1.48% 1.46% 1.03% 0.85% 0.76% 0.83% 0.75%
2yr Note 1.61% 1.49% 1.44% 1.34% 1.29% 1.25% 1.38%
5yr Note 1.66% 1.54% 1.50% 1.38% 1.28% 1.20% 1.34%
10yr Note 1.84% 1.70% 1.65% 1.53% 1.45% 1.41% 1.61%
30yr Bond 2.27% 2.19% 2.14% 2.05% 1.98% 1.97% 2.21%
2s/10s 23 bps 21 bps 21 bps 19 bps 16 bps 17 bps 23 bps
5s/30s 61 bps 65 bps 64 bps 67 bps 70 bps 77 bps 87 bps
10s/30s 44 bps 49 bps 49 bps 51 bps 53 bps 55 bps 60 bps
(Source: Janney Investment Strategy Group. All numbers are period-end forecasts.)
WWW.JANNEY.COM • © JANNEY MONTGOMERY SCOTT LLC • MEMBER: NYSE, FINRA, SIPC • JANNEY OUTLOOK 2020 • REF: 191213A • PAGE 8TAXABLE FIXED INCOME
YEAR AHEAD WILL BE ONE As such, total returns year-to-date have
OF TRANSITIONS been robust across major fixed income
asset classes, with investment grade
The year 2019 was a volatile one. and high yield leading at 13.5% and 11.8%,
In the background, various geopolitical respectively, as of writing.
risks have been affecting investor sentiment. Various drivers supported the hunt for
Tariffs and the trade war between U.S. yield including a shift in monetary policy
and China remained the major uncertainty with three rate cuts, as of writing, coupled
weighing on the economic outlook. with relatively positive economic data thanks
JODY K. LURIE, CFA®
Other issues, including shifting monetary to consumer spending and labor conditions.
Director and Corporate
Credit Analyst policies at the many central banks, At the same time, certain events, including
contentious elections, Brexit (or lack thereof), the volatility in the repo market, the selloff
Jody K. Lurie, Director and
Corporate Credit Analyst in and a defaulting Argentina, have contributed in triple C corporates of late, and the rotation
Janney’s Investment Strategy to the hazy near-term outlook. out of leveraged loans, signal that credit
Group, serves the Firm’s conditions could reverse, so perhaps the
Private Client Group as the Volatility in currencies stemmed from,
and added to, the situation. strategies employed this year may not suit
expert in corporate bonds,
preferreds, and other taxable next year.
fixed income asset classes. Echo effects into manufacturing data
and corporate capital expenditure plans 2020 will likely be a transition year.
In this role, Jody provides
commentary on overarching have dampened the prospects for rising Market liquidity will remain a fair-weather
trends and investment ideas inflation. The slowdown in the auto sector friend. Institutional investors will be looking
in taxable fixed income, as is representative of the current phase of the at ways to reposition their largest corporate
well as research and strategy economic cycle, although the easy access
about issuers’ debt structures bond investments, which will have a ripple
to capital, thanks in part to central bank effect into individual bonds. The direction
at the micro level, offering
trade recommendations and interventions, means we are not yet in the of fund flows should be watched heavily
portfolio reviews to retail next phase of the credit cycle. as an indicator of which way the wind might
and institutional accounts. be blowing.
Jody covers an extensive
list of companies across
THE HUNT FOR YIELD
We anticipate the yield-hunt of 2019
several industries, including,
The U.S. fixed income markets have remained persisting into 2020, with investors once
but not limited to, banks
and non-bank financials, open to new issuers, as investor demand has again taking down their defenses just
industrials, oil & gas, metal sustained. Because of the 4Q 2018 selloff in enough to let the Trojan horse into the city.
& mining, food & beverage, risk assets, the year began with a low base.
retail, and telecom. She has
taken particular interest in Chart 8: Year-to-Date Total Returns Are Robust for All Major Fixed Income Asset Classes
niche topics, including the
consumer credit conversation
Bloomberg/Barclays Total Returns
and its effects on the overall
economy, along with post- Index YTD 3yr 5yr 2018 2017 2016 2015 2014
recession market liquidity.
US Aggregate 8.4% 12.4% 17.0% 0.0% 3.5% 2.6% 0.5% 6.0%
Jody is a Chartered Financial
Analyst® (CFA) charterholder US Treasury 7.1% 10.3% 13.6% 0.9% 2.3% 1.0% 0.8% 5.1%
and a member of the CFA US Municipal 6.7% 13.9% 19.1% 1.3% 5.4% 0.2% 3.3% 9.1%
Society of Philadelphia. She
US IG Corporate 13.5% 18.6% 25.7% (2.5%) 6.4% 6.1% (0.7%) 7.5%
holds Series 7, 63, and 79
licenses. She graduated US HY Corporate 11.8% 20.8% 30.2% (2.1%) 7.5% 17.1% (4.5%) 2.5%
with honors from Bryn Mawr
US MBS 6.0% 9.6% 14.0% 1.0% 2.5% 1.7% 1.5% 6.1%
College, where she received
her A.B. magna cum laude US TIPS 7.8% 9.7% 12.7% (1.3%) 3.0% 4.7% (1.4%) 3.6%
in Mathematics (Honors) and
Global Aggregate 6.3% 12.0% 11.3% (1.2%) 7.4% 2.1% (3.2%) 0.6%
Economics.
Euro Aggregate 6.7% 8.6% 14.6% 0.4% 0.7% 3.3% 1.0% 11.1%
Asian Pacific Aggregate 2.3% 4.2% 7.4% 0.0% 1.6% 2.1% (0.1%) 6.3%
Global Infl-Linked 6.9% 13.0% 10.3% (4.1%) 8.7% 3.9% (5.0%) 3.4%
(Source: Janney Investment Strategy Group; Bloomberg/Barclays Indices; Year-to-date, 3-year, and 5-year as of 11/19/2019)
WWW.JANNEY.COM • © JANNEY MONTGOMERY SCOTT LLC • MEMBER: NYSE, FINRA, SIPC • JANNEY OUTLOOK 2020 • REF: 191213A • PAGE 9This is when returning to the basics, including There is value in CD ladders inside of five years to
diversification, will be key. Investors will do well to define bolster returns above holding cash, while at the same
once again their risk tolerance and investment objectives, time allowing for steady investment opportunities in
using those as the base for decision-making and not tenuous times.
market timing.
TIPS provide a different type of diversification beyond
We see value in taking some risk in higher-rated U.S. traditional bonds with nominal yields, so it may be
corporates on a credit-selective basis, mortgage-backed beneficial to incorporate them in the average portfolio.
securities, and strategic emerging market sovereign debt.
For the latter, it is important to avoid government debt of
countries experiencing populist-driven political situations
for the uncertainty they bring, but some risk taking may
be worthwhile.
Chart 9: Global High Yield and U.S. MBS Credit Spreads Have Been Drifting Wider Lately, while Global Aggregate, U.S. Corporates, and U.S.
Global
High Yield HighNarrowing
Have Been Yield and U.S. MBS Credit Spreads Have Been Drifting Wider Lately, while Global Aggregate, U.S. Corpor
U.S. High Yield Have Been Narrowing
300bps 1000bps
US Investment Grade
900bps
US Mortgage-Backed Securities
250bps
Global Agg Credit 800bps
Global High Yield
US High Yield 700bps
200bps
600bps
150bps 500bps
400bps
100bps
300bps
200bps
50bps
100bps
0bps 0bps
Nov-2009 Jul-2011 Mar-2013 Nov-2014 Jul-2016 Mar-2018 Nov-2019
(Source: Janney Investment Strategy Group. Bloomberg/Barclays Indices; as of 11/25/2019.)
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The first half on 2019 was slow for the This is especially true if interest rates remain
municipal market. in the current low range. We project that
2020 primary supply will reach $440 billion
The tax legislation of December 2017 (vs. $410 billion estimated in 2019) with
eliminated the use of tax-free bonds for taxable issues comprising $100 billion of
advance refundings, removing a significant that total.
chunk of potential supply and setting
the stage for light 2018 issuance, which Another trend we expect to continue in
continued into the first half of 2019. 2020 is strong inflows to muni mutual funds
and muni exchange-traded funds (ETFs).
ALAN SCHANKEL But as interest rates approached record
Managing Director lows this summer, investment bankers Since 2016, according to Federal Reserve
Municipal Credit found that taxable municipal yields were data, municipal holdings of the household
Research Analyst low enough to make the math of advance sector (primarily individual investors) have
With over 50 years of refundings work again. grown by only 1% (to $1.89 trillion in 2Q19)
industry experience, while mutual fund positions are 22% higher
including 30+ at Janney, Advance refunding volume picked up, ($772.7 billion) and ETFs hold 68% more
Alan Schankel has held driving new issue supply higher with taxable munis ($41.5 billion).
management roles in fixed issuance in 2019, double the 2018 pace
income underwriting, sales,
through 11 months. As next year is an election year, political
trading, and research, with
particular focus on state calculus may also impact investor decisions,
and municipal finance. Alan Chart 10: Lower Interest Rates Supported Higher with some commentators suggesting that a
publishes regular municipal Levels of Taxable Issuance in Recent Months Democratic win will lead to higher tax rates,
bond strategic and research increasing the value of the tax exemption.
commentary in Janney’s $75 bln BABs Era Tax Exempt and AMT 50%
Although we favor direct investment for
daily, weekly, and monthly $60 bln Taxable 40%
publications, and is quoted $45 bln
Taxable Percentage
30%
larger portfolios, investment vehicles such
frequently in local and $30 bln 20%
as mutual funds and particularly ETFs can
national media including $15 bln 10% complement a portfolio of individual muni
Bloomberg, Dow Jones, $0 bln 0% bonds by expanding diversification.
Reuters and the Bond Buyer.
Jun-12
Jun-17
Dec-09
Dec-14
Dec-19
Aug-11
Aug-16
Oct-10
Apr-13
Oct-15
Apr-18
Feb-09
Feb-14
Feb-19
He has also appeared on
CNBC, Bloomberg, and Fox CREDIT IMPROVEMENTS
Business television shows. (Source: Bloomberg, Bond Buyer)
Credit conditions in the muni markets have
He is active in a variety of
been steadily improving.
industry groups, has served
on the FINRA Fixed Income INFLOWS FOR MUTUAL FUNDS
Generally, we view the state and local
Committee and is a regular CONTINUE RECORD PACE
arbitrator for FINRA Dispute
government sector as stable. But, for a few
Resolution. Alan is a graduate Unlike December 2017, when muni supply fiscally weaker states and cities, challenges
of the Wharton School of the reached record levels as issuers rushed to beat persist, especially with pension funding.
University of Pennsylvania the tax law’s year-end deadline for tax-free
and has done postgraduate advance “refundings,” the current supply bulge Illinois Pension Funding is an Exception
work at the University
of Pennsylvania, Temple
seems likely to continue into the new year.
Recently released data from the lowest-
University, and Rutgers. He is rated state, Illinois (Baa3/BBB-/BBB), shows
a Past President of both The Chart 11: Record Mutual Fund Inflows Should
Bond Club of Philadelphia Continue into 2020 that unfunded pension liabilities reached
and the Municipal Bond Club a new record of $137.3 billion in fiscal year
of Philadelphia. $100 bln
2013 2014 2015 2019, leaving state pension plans about
$75 bln 2016 2017 2018 40% funded.
$50 bln 2019
$25 bln
In an effort to expand revenue sources,
$0 bln Nov 2016 the state will ask voters to approve a
-$25 bln
Federal Election
constitutional amendment in November
that will allow a progressive tax rate scheme
June 2013
Taper Tantrum (Fed)
-$50 bln
instead of the current flat income tax (4.95%).
-$75 bln
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
The measure, if approved, will likely be
(Source: Investment Company Institute)
followed by a tax hike for high-income
WWW.JANNEY.COM • © JANNEY MONTGOMERY SCOTT LLC • MEMBER: NYSE, FINRA, SIPC • JANNEY OUTLOOK 2020 • REF: 191213A • PAGE 11residents and a stronger revenue stream to support higher FALLING INTEREST RATES UNLIKELY TO BE AS BIG
pension funding levels. We advise caution with the higher A FACTOR IN 2020
education sector, as demographic shifts and affordability
issues stress enrollment, especially for smaller, less Although 2019 was a good year for municipal investors,
selective private schools. with the Bloomberg Barclays Muni index showing a 7.8%
return in 2019 (through December 4), most of the gain
Healthcare Sector Consolidation was because of falling interest rates through most of 2019.
We do not expect that type of performance in 2020, with
Healthcare sector consolidation is creating huge, multi- returns coming primarily from coupon payments, rather
state systems that are better equipped and financed to than appreciation.
deal with the changing healthcare environment in the
face of contracting reimbursements from government
payors such as Medicare and Medicaid and the political
uncertainty of future federal policy in an election year.
Disclosures Definition of Ratings
This is for informative purposes only and in no event should be construed as a Overweight: Janney ISG expects the target asset class or sector to outperform the
recommendation by us or as an offer to sell, or solicitation of an offer to buy, any comparable benchmark (below) in its asset class in terms of total return.
securities. The information given herein is taken from sources that we believe to be
Marketweight: Janney ISG expects the target asset class or sector to perform in line with
reliable, but is not guaranteed by us as to accuracy or completeness. Opinions expressed
the comparable benchmark (below) in its asset class in terms of total return.
are subject to change without notice and do not take into account the particular
investment objectives, financial situation, or needs of individual investors. Employees Underweight: Janney ISG expects the target asset class or sector to underperform the
of Janney Montgomery Scott LLC or its affiliates may, at times, release written or oral comparable benchmark (below) in its asset class in terms of total return.
commentary, technical analysis, or trading strategies that differ from the opinions
expressed here.
Benchmarks
Returns reflect results of various indices based on target allocation weightings.
Weightings are subject to change. Index returns are for illustrative purposes only and Asset Classes: Janney ISG ratings for domestic fixed income asset classes including
do not represent the performance of any investment. Index performance returns do not Treasuries, Agencies, Mortgages, Investment Grade Credit, High Yield Credit, and
reflect any management fees, transaction costs, or expenses. Indexes are unmanaged, Municipals employ the “Barclays U.S. Aggregate Bond Market Index” as a benchmark.
and you cannot invest directly in an index. Treasuries: Janney ISG ratings employ the “Barclays U.S. Treasury Index” as a benchmark.
Performance data quoted represents past performance and is no guarantee of future Agencies: Janney ISG ratings employ the “Barclays U.S. Agency Index” as a benchmark.
results. Current returns may be either higher or lower than those shown.
Mortgages: Janney ISG ratings employ the “Barclays U.S. MBS Index” as a benchmark.
This report is the intellectual property of Janney Montgomery Scott LLC (Janney) and
may not be reproduced, distributed, or published by any person for any purpose without Investment Grade Credit: Janney ISG ratings employ the “Barclays U.S. Credit Index”
Janney’s prior written consent. as a benchmark.
This presentation has been prepared by Janney Investment Strategy Group (ISG) and High Yield Credit: Janney ISG ratings employ the “Barclays U.S. Corporate High Yield
is to be used for informational purposes only. In no event should it be construed as Index” as a benchmark.
a solicitation or offer to purchase or sell a security. The information presented herein Municipals: Janney ISG ratings employ the “Barclays Municipal Bond Index” as a benchmark.
is taken from sources believed to be reliable, but is not guaranteed by Janney as to
accuracy or completeness. Any issue named or rates mentioned are used for illustrative
purposes only and may not represent the specific features or securities available at a Analyst Certification
given time. Preliminary Official Statements, Final Official Statements, or Prospectuses for
any new issues mentioned herein are available upon request. The value of and income We, Mark Luschini, Guy LeBas, Jody Lurie, and Alan Schankel, the Primarily Responsible
from investments may vary because of changes in interest rates, foreign exchange Analysts for this report, hereby certify that all views expressed in this report accurately
rates, securities prices, and market indices, as well as operational or financial conditions reflect our personal views about any and all of the subject sectors, industries, securities,
of issuers or other factors. Past performance is not necessarily a guide to future and issuers. No part of our compensation was, is, or will be, directly or indirectly, related
performance. Estimates of future performance are based on assumptions that may not to the specific recommendations or views expressed in this research report.
be realized. We have no obligation to tell you when opinions or information contained in
Janney ISG presentations or publications change.
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