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Global Portfolio Strategy

Global Portfolio Strategy

February 01, 2020

A monthly global review and look forward

Data reported in January and early February reflected continued, moderate growth in the U.S. economy. U.S. manufacturing data improved from weak levels, defense drove durable goods order growth, and underlying data on the U.S. consumer and job growth was solid. The S&P 500 Index was flat for the month while the 10-year Treasury yield fell 0.31% basis points to 1.51% amid coronavirus outbreak fears.

Investment Takeaways:

  • Our S&P 500 Index year-end 2020 fair value target is 3,250–3,300, based on a price-to-earnings (P/E) ratio of 18.75 and our 2020 S&P 500 earnings forecast of $175 per share.* With stocks already at our target, a potential further stock market advance in 2020 may be limited.
  • We favor large cap stocks as the business cycle ages and recommend balanced exposure between the growth and value styles in equity allocations where suitable.
  • Attractive valuations and solid economic growth may favor emerging markets over foreign developed markets, although coronavirus impact is temporarily offsetting the benefits of the phase-one trade deal with China.
  • Slower but still solid economic growth and modest inflation may put upward pressure on yields, but geopolitical uncertainty and global appetite for U.S. Treasuries may keep yields range bound.
  • We favor a blend of high-quality intermediate bonds, focused on mortgage-backed securities (MBS), where appropriate, for a diversifying source of yield that may help mitigate risk of higher interest rates.
  • While economic growth is supportive of investment-grade corporates, we take a neutral view because of the tight credit spreads and declining credit quality.
  • The global stock rally continues to be buoyed by strong participation. With overly optimistic sentiment becoming a tactical risk, however, we see technical support near 3,030 on the S&P 500 Index.
  • Key changes from January’s report: Upgraded our views on financials and industrial metals to positive.