This late in the business cycle, investors should emphasize actively-managed funds and income-producing securities with reasonable valuations.

It’s that time of year when investment strategists across Wall Street form their outlooks for the next year. I can say a few things with near certainty about 2020: There will be a U.S. Presidential election, an Olympics and a leap year. Beyond that, I have very little true visibility. 

The U.S. economy looks somewhat precarious. We are late in the economic cycle, corporate earnings are shrinking and manufacturing is weak. Yet stock markets are reaching new highs bolstered by accommodative monetary policy and hopes for a resolution of trade tensions. Will a strong consumer and healthy labor market be enough to keep stocks moving higher? I’m not convinced.

Consider the likelihood of potential drivers of more stock market upside. Will U.S. economic growth pick up? Morgan Stanley & Co. economists forecast just 1.8% GDP growth in 2020. That’s below the average of 2.2% this economic cycle. Could the Federal Reserve keep cutting rates? It has indicated it may sit on the sidelines in 2020. Could stock valuations continue to rise anyway?  At almost 19 times forward earnings, the S&P 500 is in the top quartile of richness for the past 40 years.

To me, material upside seems capped. Luckily, there are buffers to downside risk as well. Investors, both individuals and institutions, have a lot of cash on the sidelines which they are likely to deploy if there is a downdraft. That dynamic should allow markets to remain resilient going forward, even if there is an economic or policy setback.

Overall, my outlook is for 2020 to be an uninspiring year economically and markets to remain in a narrow range.

Longer term, I see lower than average gains ahead. In the past decade, the S&P 500 has returned roughly 14% a year and the U.S. Barclays Aggregate Bond Index has returned 9% a year—two or three times the normal amount for the last 100 years. Our Global Strategist Andrew Sheets estimates that in the next decade, U.S. stocks may return just roughly 5% a year and bonds a little over 2%.

Given that backdrop, I recommend investors emphasize broad diversification across asset classes and geographies and choose active fund managers who can navigate changing market conditions. For equities, I think it will be important to choose stocks with reasonable valuations that deliver some income, which can support valuations in a downturn.

For individual investors, our market outlook should be seen in the context of a long investment horizon that is underpinned by a comprehensive financial plan. Your financial plan should reflect the goals you are looking to achieve over time and a disciplined approach to asset allocation, saving and withdrawals. A Financial Advisor can help.