Like Main Street investors reviewing their 401(k) statements, mutual fund manager Justin White is trying to identify the types of stocks and industries that will rack up the best returns next year.
But he’s not just analyzing financial ratios and profit forecasts. The stock picker is also monitoring presidential politics, tariff news and global growth.
The reason? How specific sectors of the market perform in 2020 could hinge on who wins the White House, how U.S. and China trade talks play out and whether weak foreign economies can rebound.
The returns that investors can expect in 2020 after a 25% gain so far this year will depend on how sectors like technology, health care and financials fare in the broadly diversified Standard & Poor’s 500 stock index.
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What’s more, for investors trying to beat the performance of the S&P 500 by creating their own stock portfolio, success will hinge on several events: Will a less business-friendly candidate like Elizabeth Warren defeat Donald Trump for the presidency? Will there be a détente in the trade war between China and U.S.?
White, manager of T. Rowe Price’s New America Growth fund, says the top issues he is focusing on are the election and the health of the industrial economy, which will have “meaningful implications for the market.”
Depending on how things play out, here’s what types of stocks are poised to do well in 2020.
The ‘trade war’ effect
Will it be deal or no deal in the tense trade talks between the U.S. and China? The outcome will have economic repercussions and affect the types of stocks investors will want to own.
Some sort of agreement or truce “will signal that the worst of the global slowdown is behind us, paving the way for a rally in “cyclical” stocks, or companies whose shares fare better when business conditions are improving, says Jason Trennert, chairman of Strategas Research Partners. The global economy in 2019 is on course for its slowest growth since the financial crisis, the IMF says.
If trade fears fade, it would lift U.S. stocks in the industrial and financial industries. They include heavy equipment makers and banks, whose fortunes would brighten as economic clouds lift, Trennert says. Tech shares, especially semiconductor makers, should also rise along with demand for their products.
A trade deal, Trennert says, could turn investors’ recent “flirtation” with cyclical and cheaply priced value stocks into a “romance.”
The ‘value’ effect
For the past decade, “growth” stocks like Apple, Facebook and Amazon, have led the market’s gains as investors flocked to them for their strong sales and earnings in a slow-growth world. By contrast, “value” stocks have lagged, with the weaker global economy denting their prices and profits.
But value-style investing could make a comeback due to receding recession and trade war fears, says Charlie Bobrinskoy, head of the investment group at Ariel Funds. Compared with faster-growing companies, value stocks, he points out, are trading at much lower valuations, or the price of their stocks relative to what they earn.
“The names that are the cheapest are the ones that have exposure to the overall economy,” Bobrinskoy says.
Value stocks Bobrinskoy likes include BorgWarner, the maker of powertrains and auto parts, which got beaten down over worries about slowing auto sales; advertising firm Interpublic Group, whose shares got hit due to fears of companies cutting back on ads; and Kennametal, which makes cutting tools used to rebuild roads. All three stocks trade at around 11 times projected 2020 earnings, he says, which is cheaper than the S&P 500’s price-to-earnings ratio of roughly 18.5.
Another beaten-down sector with upside is health care, says T. Rowe Price’s White. It’s the second-worst performing sector this year, due in part to talk of “Medicare for All” from Democratic presidential hopefuls like Bernie Sanders and Elizabeth Warren. Despite worries about the expense of this proposal, “the odds for ‘Medicare for All’ is very low,” says White, adding that the sector has priced in lots of bad news and is poised to move higher.
The ‘economic’ effect
If the industrial economy grows at a faster pace in 2020, stocks that depend on global growth will get a lift.
When it became clear in September that the global economy wasn’t on the brink of recession and that a trade deal was closer, a shift began into cyclical stocks, such as industrial companies and railroads. This trend, White predicts, could have legs into the early part of next year if healthy economic signs persist. White has already added to his investments in companies like railroad Union Pacific to take advantage of a global upturn. Stocks like Rockwell Automation, which he doesn’t own, have spiked 40% since late August.
“Basically, those are the kinds of stocks and sectors that lead the market when the economy is in an early recovery process,” White says. Energy shares should also benefit from a global upturn.
The ‘election’ effect
President Trump’s corporate tax cuts and other economic policies are viewed as more market-friendly than calls from Democrats like Warren for higher taxes, “Medicare for All,” and increased bank regulation.
“If Elizabeth Warren wins, which doesn’t seem super likely to me, it would likely send us into a bear market and likely into recession,” White says.
A Warren nomination and defeat of Trump would be bad news for certain sectors, Bobrinskoy adds. Warren is campaigning on banning fracking, taxing billionaires, and toughening bank rules.
“Warren’s plan to ban fracking would be very bad for the energy industry,” Bobrinskoy says. “Her proposals tend not to be friendly to U.S. banks.”