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New year, new markets. With 2019 over, the markets have already changed significantly. With new tensions rising, you are probably worried about what you should invest in for the new year. There are many things that could happen this year. In this post I will address what to expect in the economy for 2020.
Equity Markets Are Overvalued
The market cap to GDP ratio for stocks is currently 1.534 at the start of January. That means there is $1.534 of money capitalized in the stock market to $1 produced. There is more money invested in companies than produced. Usually, stocks are considered fairly priced if the market cap to GDP ratio is between 0.75-0.90. The stock market is considered to be anywhere from ~166% – >200% of what would be a fair value.
Sorry folks, but you may expect the domestic stocks to drop in 2020. This may be the form of a recession or some correction.
Start Value Investing
Rob Arnott, chairman at Research Associates and top investor, says it may be time to focus on value investing and he is not the only one. You may want to look for undervalued companies to invest in. Companies sought by value investors tend to be less volatile and less risky.
New Tech Bubble?
With many tech IPOs being unprofitable, or even losing money, some people think that we may face a new tech bubble like the Dot Com Bubble. With the close of the tech IPO WeWork many people are afraid this is the start of a tanking economy. In addition, FAANG stocks, or the top 5 stocks in the S&P 500, after massive growth entered a bear market and new policies may lean towards different sectors.
Does this mean the market is likely in a new tech bubble? Should you expect a Dot Com Bubble 2.0 in 2020? It is possible. It is almost unquestionable that the FAANG stocks are overvalued and that other tech companies may still be unprofitable. The question is: can these companies become VERY PROFITABLE?
These companies may have some growth but can they be very profitable? I cannot see many of the FAANG companies growing too much, but some IPOs may become more profitable. For instance, ridesharing companies may be due for self-driving cars. With self-driving cars, not only could these IPOs change, but other businesses including hospitality could change. I can see businesses and platforms using self-driving cars to their full potential and not only breaking records as the fastest growing companies, but producing the first trillionaires. That is, IF self-driving cars work. If, for whatever reason, they do not pick up, the entire opportunity could be a dud. I do not expect self-driving cars to storm streets in 2020, but I want to pay attention to see where this is going. 2020 will likely be an important year for these types of platforms.
Bonds And Gold Are In Higher Demand
Almost as soon as it became 2020, investors had more demand for bonds and gold. The US-Iran tensions have made investors turn towards safer investments. Does that mean more volatile investments are bad? Not necessarily, but the tensions coupled with the overvaluation of the US stock market may cause a leaning to different types of investments such as bonds and gold. I own some bonds, but I have not invested in gold.
Since the start of the last decade, US stocks have significantly outperformed international stocks. However, many international stocks are undervalued as opposed to many of the US stocks being overvalued. While the global economy was slowing down the US kept going. This could spell great opportunities for you. It may be time to stop looking in our borders for the next best investment opportunity.
2020 has already started with new demands for the market. This may be a great year for growth, but many signs point towards a correction. Hopefully, you have invested for retirement or any other goal for your future, and with any luck, you have grown your worth in 2019. I would not expect 2020 to be a repeat of 2019. What made you money in 2019 is not as likely to make you money in 2020. It may be time in diversify your portfolio and look to some other types of investments and to look overseas for new equities to forge your wealth.