My annual stock market outlook and how to invest $1,000 in 2020
What are going to be the best investments for 2020 and how should you invest $1,000 for market-busting returns?
In this video, I’ll detail the potential in stocks, real estate and gold to show you where the biggest opportunities await. I’ll reveal the biggest risks to your 2020 portfolio and show you how to avoid them with a single investment.
We're building a huge community on YouTube to beat your debt, make more money and start making money work for you. Click over to join us on the channel and start creating the financial future you deserve!
Join the Let's Talk Money community on YouTube!
2020 Stock Market Outlook
Nation, when I worked for private wealth managers, every year in December they would get everyone on a call, all the analysts for each asset class. It would be our role as an analyst to argue the case for returns over the next year in that asset class, whether it be stocks, bonds, real estate or commodities.
It was this one call that would guide the manager’s investment strategy for the next year and I loved listening to the different perspectives, getting that big picture view of wealth and how to position for portfolio-busting returns.
We did something like this last year, looking at seven different assets and it immediately became one of the most popular posts on the blog. I walked through the potential in stocks, real estate, startup investing, gold, p2p loans, business investments and art for 2019.
And it was an amazing year for investors. I called out gold and real estate as the two asset classes to watch and they didn’t disappoint. Gold finished the year up 15% which is it’s best return in nine years. Real estate finished higher by 27% and it’s best performance in five years. Stocks ended up about 30% higher and even corporate bonds came through with a 14% return for the asset’s best performance in a decade!
How Will Stocks Do in 2020?
After such a stellar year, you might think investors should pull back and protect their portfolios in 2020, that we’re due for a down year but history shows that might not be the case.
There have been seven years since 1980 when the market was up 25% or more and six of the following years produced positive returns. Of the seven, just 1981 resulted in a down year and the average return on years following those massive gains, over twelve-percent.
But I don’t want you to think you can just throw your money at the riskiest stocks and bank double-digit returns this year. We’re at decade-high stock valuations and there are some risks you need to watch. In this video, we’ll look at those risks and the outlook for 2020. I’ll detail the potential in those three asset classes; stocks real estate and gold and who you how to invest $1,000 dollars in each.
Now the overall market outlook for 2020 looks good. Like we saw in the data, seven times the S&P 500 has produced a 25% return or higher and six out of the seven following years, the market was up again.
The trade war between the U.S. and China has cooled with a phase one deal to be signed in January that will see some of the tariffs come off. That could boost capital spending by businesses which was one of the few overhangs in 2019.
Higher rates have been one of the most frequent and reliable precursors to stock market weakness but the Fed is pretty much out of the picture for the year. Chair Powell has committed to not raising interest rates without a big spike in inflation.
Even the consumer, the driver for over 70% of the economy, is looking strong. Consumer spending has really held up and driven the markets and if we look into credit spending or defaults or any of those usual warning signs, there’s nothing there to worry for 2020.
Are Stocks Expensive in 2020?
But against all this optimism, there are still risks for 2020 stocks. To start, stocks are just historically expensive. This chart shows the current forward price-to-earnings ratio of each stock sector as well as the ten-year average PE ratio in green. I’ve calculated and added to the chart the premium at which each sector is trading versus its longer-term average.
For example, on the far right we see the stocks in the Consumer Discretionary sector are trading for a price of 21.8-times the earnings analysts expect those companies to make in the next year. That’s 26% higher than the ten-year average PE ratio of 17.3-times forward earnings.
Another example here and the most expensive sector right now, Tech stocks are trading at over 21-times forward earnings, which is 40% more than that long-term average price-to-earnings.
In fact, only the energy sector is trading at a discount. Stocks in the energy sector are trading for a price of 17-times expected earnings versus that longer-term average of 20-times earnings for a 15% discount.
Starting from this level on valuations and even if stocks eke out a positive gain on the year, it’s likely not going to be much more than ten- or fifteen-percent tops. Earnings for companies in the S&P 500 are expected higher by less than a percent through 2019 and I very much doubt earnings growth will reach 10% in 2020 which is where analysts expect it to be by the end of the year.
This combined with headline risks around the election and the potential for another flare-up in trade and while stocks might end up higher at the end of the year, it could be extremely bumpy along the way.
Stocks for 2020
So let’s explore the outlook on three asset classes; stocks, real estate and gold and how to combine them for the highest possible return this year.
First up is stocks and we’ve already seen data on that overall stock market trend but that doesn’t mean every sector will do well.
We covered all 11 stock sectors in our sector investing series including how to compare stocks in each and five of my favorite picks and I’ve got to say, I think the Energy and Financials sectors have the potential to outperform this year.
Oil and gas stocks are by far the cheapest in the market and are providing some huge dividends like the 10% yield on shares of pipeline companies in the Alerian MLP ETF, ticker AMLP, or even the 3.7% dividend on the Energy Sector fund, ticker XLE.
These companies have been cutting costs for years, improving profitability to survive lower energy prices and could see cash flow jump if crude prices keep their recent trend. Yes, electric vehicles could erode demand eventually but we’re talking five-plus years out and 2020 could be the year for energy stocks.
Bank stocks and other financials are the second-cheapest sector and the steepening yield curve since October points to a profitable year for the sector. We pointed to the SPDR S&P Regional Banking ETF, ticker KRE, and M&T Bank, ticker MTB, as two of the best ways to play this in our sector video.
Now if you remember the our healthcare stocks video, I really like this sector for not only a long-term investment but also as insurance against your own rising costs for healthcare. The problem here is, maybe besides the hugely expensive tech sector, this is probably going to be the riskiest sector in stocks this year.
Both sides, Republicans and the Democrats, are going to be talking up their plans to lower healthcare costs and that could mean headline risks on the news. Now if you look at actual effect on the sector, it’s obvious neither side is willing or able to really move prices that much so I don’t think this is a long-term risk but there will definitely be ups-and-downs for healthcare stocks this year.
Now, I want to share a trading strategy I’m using but need to put in this disclaimer. This is not about whether you’re a Republican or a Democrat. It’s not about what policies you feel are better for the nation. This is about how I believe the stock market will react to political risks and how I am playing it as an investor.
So if you do own healthcare stocks or any of the drug-makers, watch for February 3rd and 11th. Those are the dates of the Iowa caucus and the New Hampshire primary for the Democratic nomination and why this could be risky is that progressive candidates are likely to do better in these first two contests. So if we see a Sanders or a Warren win big here and if it looks more likely either will win the nomination over Biden, then healthcare stocks are going to get hit hard.
I’m not making this about politics or a video about what healthcare system we need. I’m just saying that the more progressive candidates are likely to push for bigger changes to healthcare and that could spook the markets.
In fact, towards the end of December, I bought put options on the S&P 500 index for a February 21 expiration. These options give me the right to sell the S&P ETF, ticker SPY, at $305 when they expire in February, basically helping me to hedge any risk in January and through those first nominating contests.
I think these first months, February through Super Tuesday on March 3rd, are really where you see most of the political risk for stocks. If we get through Super Tuesday and it looks like the centrist candidate will win the nomination, we could see a relief rally in stocks on the hope that the more progressive ideas will be off the table.
If you’re thinking about using this options strategy or just want to trade stocks, I’d recommend the Webull platform on its advanced charting and research tools. Webull also offers a stock simulator to test out your strategies and a free share of stock worth up to $1,400 when you fund an account.
An alternative if you want a longer-term investing strategy and easier automated investing, you might try M1 Finance which is the platform we used for our 2019 Challenge portfolio. M1 lets you pick your investments then automatically reinvests any dividends or deposits across the entire portfolio. You can pick your own stocks or invest in expert portfolios shared across the platform.
I use both of these platforms, both are 100% commission free and offer a lot of great features for both stock market traders and the longer-term investor.
Real Estate Investing 2020
Now on to my favorite asset class, real estate, and as much as I’d like to say there is no way in hell commercial property returns another 20%-plus year like the last, like stocks, history says it can.
Real estate, and here we’re talking about returns on equity real estate investment trusts, so those companies that own commercial property and trade like stocks, the group jumped 27% in 2019 and has returned 25% or higher in 11 years since 1980.
Six of those years were back-to-back like in ’82 and ’83 when the two-year return was 65% or in 2003 and 2004 when the REIT index jumped 80% in two years.
So it wouldn’t be out of the question to have another very good year for real estate and the average return each year after those 11 double-digit gains was 13%, so not too shabby.
But if you look at the real driver on that 27% return last year, the fact that the Fed cut interest rates three times, then we’re probably not going to see twenty-plus percent returns this year. The Fed isn’t going to be hiking rates but it’s going to take some deep economic pain to cut further and that wouldn’t necessarily be a great think for property prices anyway.
You can still collect some solid cash flow from names like Duke Realty, ticker DRE, or always my favorite the Vanguard Real Estate ETF, ticker VNQ, and this is one of the best long-term wealth builders whether prices are up this year or not.
Another way to get started in real estate is through Fundrise, a platform that invests directly in property projects and then sells shares to investors. I just started investing in October but am already seeing a 7% annualized return on dividends and total return on the platform has been between 9% to 12% since 2014.
What I like about Fundrise besides getting that stress-free management by property professionals is the site is completely transparent on the investments in your portfolio. With a thousand dollars, I invested in a portfolio of 35 projects across the U.S. and in different property types. Fundrise updates you every time they add another property or when an investment closes out. You can see projected returns and risk ratings on each property in the portfolio.
The platform has a special risk-free offer for new investors. Invest $500 and try it out for 90-days. If you’re not completely satisfied, Fundrise will return your entire investment.
Gold Investing 2020
I picked gold as our third asset instead of bonds for a couple of reasons. First is I just don’t think bond returns have much upside this year, even if we see some weakness in the stock market.
The Fed probably isn’t cutting rates and it’s more likely that long-term rates will continue to move marginally higher which is going to be bad news for bonds. Remember, bond prices move opposite of rates so if interest rates increase, bond prices drop and returns fall.
Since 2000 when we really started a new low-rate era, bonds as an asset class have returned 10% or more in six years but the average return has fallen to just 3% for the following year.
Gold has seen huge buying by the world’s Central Banks as they shift away from holding U.S. Treasuries and dollars. Year-to-date purchases of gold through September totaled more than 450 tons with 14 countries increasing their gold reserves in 2019.
That trend should continue as countries like Russia and China try to shift their engagement away from holding U.S. dollars for more geo-political autonomy. The 15% return on gold last year is also bringing investors back and this could be another good year for the yellow-metal.
I also think gold is a stronger hedge against stock market risk this year. Even with some market weakness, interest rates might not fall by much so bonds won’t provide that typical safety play. Gold on the other hand could rise on haven buying and any pickup in inflation.
Now all the gold bugs out there are going to be disappointed because I don’t generally recommend investing directly in gold or even gold-backed funds like the SPDR Gold Shares, ticker gld. These investments pay nothing until you sell them so it’s basically all a timing play.
Instead I like the gold miners better. Through individual miners or even the VanEck Vectors Gold Miners ETF, ticker GDX, you get the opportunity to collect dividends while you wait for gold prices to rise. Now the miners fund doesn’t pay much of a yield but it did beat that Gold Shares ETF by 20% last year and I would expect a lot of the companies in the fund to start increasing their dividends in 2020.
As a safety play, I would look to gold around the big Democratic nominating contests as well as into the summer months which tend to be weaker for stocks. I think you can take a position in stocks now and make sure you diversify your portfolio with some money in real estate as well.
2020 could be another good year for investors but you'll need to be watching for the bumps along the way. From election risks to geo-political hot-spots, it's bound to be a roller-coaster for investors. Use these three asset classes; stocks, real estate and gold to give your portfolio protection and upside.