It was a remarkable year in the markets last year. What will this year bring?

Global sentiment fluctuated between confidence and concern, and markets swung with the shifts. The interplay of unconventional monetary policy and an extraordinary global political landscape drove markets in unexpected ways. Any preview of the year to come starts with an acknowledgement of the current state of play.

At the beginning of 2019 share markets were under extreme pressure as tightening monetary conditions and trade disputes imperilled growth, and investor sentiment. Crude oil and copper prices languished at two-year lows. The US 10-year bond yield sat at 2.8%. Both institutional and individual investor cash balances were high. 

The big shift came in January. In globally co-ordinated actions, central banks shifted their stance from tightening/neutral to neutral/easing. Market reactions sparked a massive influx of cash. Share markets rose, both industrial and precious metals firmed, and the US 10-year bond yield started a decline that saw it almost halve.

The first half of calendar 2019 brought support for all asset prices, and especially growth exposures. The second half was trickier. After significant interest rate reductions around the world, central banks went to “wait and see”.  This meant every growth-related economic release, from GDP to company earnings reports, had traders speculating about the impact on valuations versus potential central bank responses.

Predicting market reactions to news became doubly hard. Would investors respond to a weaker China GDP release or non-farm payrolls number by selling shares because of the negative impact on profits, or would they buy shares in anticipation that the People’s Bank of China and the US Federal Reserve would leap to the rescue?

Yet as the end of the year approached, share markets were higher by double-digit percentages. Many hit all-time highs in the fourth quarter. Unexpected discipline from the OPEC plus cartel lifted oil prices more than 50% from their lows, and gold hit six-year highs.

The outlook for shares is dimming. The positive outlook due to easier monetary conditions is offset by high share prices and stretched valuations. Unpredictable investor reactions to news as they second-guess policy responses adds to the difficulties.

A higher probability outcome for 2020 is that stocks will trade largely sideways with an upward bias. However, the path could be even rockier than 2019, with large swings on the cards. Doubting the extremes of sentiment worked well in 2019, and could outperform in the coming year. Active investors may consider selling when conditions look terrific, and buying when conditions seem terrifying.

An important potential change in stocks in 2020 is a shift in the favoured investment style. In 2019, global investors chased growth at almost any price, driving stocks like Alphabet and Amazon to record levels, and supporting Initial Public Offerings from profitless companies like Uber. This is a fun party game, but the music may stop in 2020. In a fraught environment, investors find buying stocks with lower share prices more attractive and 2020 could be the year where value investing roars back into style.