Jeff Miller Positioning For 2020: A Crucial Year For Investors

I appreciate the invitation to join once again in Seeking Alpha’s annual program of looks at the year ahead. It is a change from my regular “week ahead” articles! The SA series is quite valuable, and I always learn a lot. This year is especially important.

What do you expect to be the key driver of stock market performance over the course of 2020?

Asset reallocation – new countries, new leadership, and new sectors. Changes will be sparked by reduced economic fear and a reassessment of potential returns. Underlying these changes is an unwinding (at least partial) of trade war effects and reduced recession concern. Take a look at recent sector performance versus long-term averages.

Source: J.P. Morgan Asset Management

As we begin 2020, are you bullish or bearish on stocks?

I am very bullish on the sectors of opportunity and bearish on the crowded trades. Investors never recovered confidence after the Great Recession. Much of the financial media focuses on what might go wrong. The result? A quest for yield accompanied by chasing what worked most recently. This is a dangerous mindset for some investors but provides an opportunity for others.


Value versus growth. This is a general opportunity, but one must be careful about the definition of “value.” I use “growth at a reasonable price” and normalized PE lower than long-term growth rate.

Non-US markets – especially the emerging markets. They are less expensive on an earnings basis and conditions are right for a rebound.

Source: Barron’s

Small and mid-cap stocks. This is another group that has lagged and is poised for a rebound.

Trade war victims. There are many stocks that suffered second and third order effects. Because the impacts are not obvious, Mr. Market has done a poor job in analyzing them.

Crowded trades:


High yield (aka ‘junk’) bonds

Bond substitutes – utilities, low volatility factors, MLPs, REITs, closed end funds, BDCs. There are some good choices, of course, but as a class the prices and risks are high. The apparent security of the yield is misleading.

FAANG stocks. In a former era, market gains were concentrated in the “nifty fifty.” Now it is the Fab Five – which account for 18% of the market.

Which issue is most likely to adversely affect U.S. markets in the coming year?

The biggest worry is the lagging business confidence. The trade war has created a lot of uncertainty. That makes it easy for businesses to say, “Let’s just put this off for a while.” Business leaders are also excessively concerned about the economy and a recession. Polls show respondents expressing confidence in their own business, but concern about everyone else’s. It is rather like 80% of all drivers saying they are above average.

Resolving even some of the trade uncertainty will help, along with continued improvement in economic data.

How does the political climate affect the risks and opportunities for next year?

It is still too soon to make even a guess on this subject, so it is not currently relevant to investment decisions. We’ll know more when we know who is in the race and what has happened to the various clouds over the President. This is a classic case of the hunger for a story, any story, creating investor angst.

Here is a surprise that I have not seen mentioned. When there is a prospective change in policies, many of the effects are “pulled forward.” It is not a simple matter of markets going up or down based upon the likely outcome. I will be watching specific policy arenas to look for anticipatory effects.

What do you expect out of the yield curve in 2020, and what impacts will that have on the equity market and the economy in general?

Since I expect gradually improving economic growth and some signs of inflation, I anticipate an increase in yield on the ten-year note. This means a somewhat steeper yield curve. I am also watching European rates, which have served to hold down the long end of the US curve.

The yield curve is principally an indicator, not a cause. That said, a steeper curve is favorable for banks (which I own) and reassuring for business confidence.

In terms of asset allocation, how are you positioned as we begin the New Year?

I continue to build positions in value (as defined above) and the four basic themes of opportunity. I refer to the combination of these themes as the Great Rotation. I expect an above average year for stocks overall with a change in leadership. Those who can find some gems among the small cap, value, and international themes will do especially well.

What ‘surprise’ do you see in the market that isn’t currently getting sufficient investor attention?

Inflation. Most of the bearish take is focused on economic weakness, little inflation, and further declines in interest rates. The labor market is getting tighter. This is worth watching closely. This chart shows the broadest measure.

This chart shows labor force participation among those of prime working age.

And this one shows housing costs.

What role will the Fed play in the coming year?

Their typical role: Punching bag! Whatever policy they choose, there is a world of critics. Since the Fed priorities have been clearly stated, I watch what they are watching — inflation and economic growth. As an inflation measure, they prefer the core PCE and have expressed a willingness to let it move higher than 2.5%. I am watching this closely.

What issue is receiving too much investor attention and/or is already priced in?

The length of the bull market. Despite the lack of evidence that cycle length predicts cycle end, people trust their guts. It just seems like something should change. When the pace of the economic rebound is considered, this cycle does not seem out of line.

Source: J.P. Morgan Asset Management


The emotional Mr. Market has priced in plenty of fear – recession, the unknown, and a list of headline risks. The backdrop is the lingering memory of the Great Recession. Stocks will certainly not rise forever, although current prices are a reasonable 18.8 times forward earnings at a time of very low interest rates. Owning a market index is fine, but investors can do much better by being selective.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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