How the Wealthy are Positioning their Assets for 2020 and our View on their Strategy
Recent trends have shown that the fear of a stock market decline is causing wealthy investors to maintain higher cash levels than they have in the past. On average, those with at least $1 million in investable assets were 75% invested, with the remaining 25% held in cash. Our experience is that many of the "wealthy" have a longer term view than others.
We find that many “ultra wealthy” people, those with over $50 million in liquid assets, like to use a barbell approach with 50% in cash and U.S. Treasuries and 50% invested in the equity markets. Many of these ultra wealthy will invest a portion of their stock market allocations in alternative investments which are not liquid. Alternatives are typically long-term investments, and usually bear a higher risk. They do this to give themselves some diversification from traditional investments.
Political issues both in the U.S. and abroad appear to be why the wealthy, no matter their political preferences, are holding a significantly higher percentage in cash than they normally would. The wealthy have concerns about U.S. and international geopolitical issues and how they might impact their portfolios. They are even more cautious in general because they believe we will see a market downturn soon, and they feel they can afford to wait the market out. A market downturn will typically last 10 to 14 months on average, but by getting out of the markets, you also risk missing the upside move.
As we get closer to the election and depending on the polls, the markets could become more volatile. Markets do not like uncertainty, and with several presidential candidates talking about profound changes, the markets could get nervous. The well respected Barron's financial magazine recently wrote that few money managers are currently bullish. Based on the Barron’s study, the mean predictions by money managers are that the S&P Index will fall 2% in 2020 and the Dow Jones Index will remain flat. Barron's pointed out that the candidates polling immediately behind Joe Biden are not considered to be friendly to business and capital markets. In recent weeks Michael Bloomberg has announced his candidacy and he is considered by some to be a centralist and more favorable to financial markets.
When we manage client assets, we think it is important to navigate through the political noise. For example, let us take investing in healthcare, obviously a hot topic on both sides. We have an incumbent who wants to tear up the Affordable Care Act, and Democrats who want to expand it or overhaul it. So, if we are going to invest in healthcare, we want to invest in the sector in such a way as to not be affected by the political outcome.
Here are six of what we feel are the most significant factors affecting the markets in 2020 and beyond, and our rating on these factors.
Financial liquidity (cash) in the economy, which results in attractive interest rates and the availability of money and credit
Company earnings
The trade issues with China, Europe and others
Income taxes, both individually and corporate
The U.S. political environment
Worldwide geopolitical issues
Financial Liquidity and Company Earnings
All the issues listed above are important, but in our opinion, liquidity or cash in the U.S. economy and company earnings are the two most important factors for a positive market outcome in 2020. The more money in the U.S. financial system, the better the markets will perform. The stronger the company earnings, the better the company's stocks will perform.
Current Rating: Very Positive
Trade Tariffs
On Friday December 13 th , the U.S and China announced they reached an agreement on a phase one trade deal. This phase one deal includes increased agricultural purchases from China and some structural changes to intellectual property and technology issues. This deal should be helpful to our farmers, our U.S. based international companies and our economy as well. Overall, this phase one deal is a good thing in our opinion, but there is still much to be done in resolving additional tariff issues with China other countries.
Current Rating: Positive
Income Taxes for Individuals and Companies
Income taxes are another very important driver for the markets. For example, should the tax rate be increased for businesses, it will lower the earnings for these companies, resulting in lower stock prices. If taxes were to be increased on individuals or businesses, the markets would probably go lower over the short term, as the markets would take time to recalibrate to higher taxes.
Current Rating: Neutral
US Political Environment
Governmental polices do affect how, when and where to invest. For example, if a strong presidential candidate wants to make major changes to tax rates or healthcare programs, the market may react. Leadership at the top in the U.S. does matter and the markets will reflect this. We need to pay attention to the White House policies as they may positively or negatively affect certain sectors of the markets.
Current Rating: Neutral
Worldwide GeoPolitical Issues
In Alexandre Dumas’ novel, The Count of Monte Cristo, written in 1844, news of a cross border revolution in Spain lead to a financial panic in France. Many French investors sold Spanish bonds at a large loss, only to see the price of the bonds recover quickly when they found the information was not accurate. In our experience, equity markets react to positive and negative news in such a way that after one or two months, the markets remain within one or two percent of where they were prior to the geopolitical event. We find for the most part, worldwide issues have not historically affected the U.S. financial markets for more than a short period of time.
Current Rating: Neutral
In Summary:
We are still constructive or modestly bullish for 2020, and our opinion is that the average money manager is too bearish. We think it is very important to be invested, but we do believe holding a good cash reserve is prudent. For most people I would suggest a 25% reserve is about right. This cash gives us the ability to add to our investments at the appropriate time, so when we do have a market correction, we are ready. My view is the markets will return 6% to 9% in 2020 on average. Not as good as 2019, but much better than many pundits are predicting.
As our readers know, we have been bullish for many months, with many of our clients holding cash but remaining well invested. This has served us extremely well, as our client's portfolios have typically outperformed the indexes while taking less risk. This is represented in our
With the investing public so under invested, our view is that you can expect the cash on the sidelines to help fuel an up market for 2020.
Our objective is to make you money, and we intend to hold great companies which will do well no matter who wins the White House.
Happy New Year and let’s have a great 2020!