Fourth Quarter Ends With A Bang | ETF Trends

By Riverfront Investment Group

Q4 2019: Taking away the ‘worst case scenario’ discount: Equity markets hate uncertainty and will assign what we call a ‘worst-case’ scenario discount to stocks when an outcome is unclear. As clarity increases, the ‘worst-case scenario’ regarding an event or issue can be proven to be unlikely and thus the discount is unnecessary, in our view. Over the fourth quarter, global markets received some of the clarity they had been searching for in the forms of an election in the UK, a Phase-1 trade deal between the US and China and the conclusion of the impeachment hearings in the House. While none of these events erased the uncertainty, each made the ‘worst-case scenario’ (‘hard’ Brexit, escalating trade war, and Senate ratification of impeachment) far less likely. As a result, risk assets such as emerging market equities generally performed well, while defensive assets like bonds posted lower returns.


Q4 2019 Total Returns


  • Lack of alternatives:  Growth-seeking investors have few options given low/negative real rates around the world.
  • ‘Cavalry’ on call: The Cavalry or Policymakers have shown a willingness to act when faced with evidence of economic weakness.
  • Election Year: Incumbent presidents are generally expected to do all they can to boost the economy to help them get re-elected.

However, we believe that 2020 may be the year that rewards the nimble who are willing to rotate between sectors and asset classes. This is because as uncertainty fades, business and consumer confidence improves; we believe this will ultimately lead to additional spending and investment. While a strengthening economy is generally good for all equities, we believe that the kinds of companies and asset classes that perform the best will be different than those that outperform when economic growth is less robust. A few of the places where that leadership change could occur include the following:

  • International could perform well:  With Brexit becoming more clear and European economies showing signs of bottoming, we could see a global synchronized recovery similar to 2017, in our opinion.
  • Cyclicals and Small/Mid-Cap (SMID) could perform well:  Questions on the economy should also lessen and could lead to increased business confidence and corporate spending, in our view. This is good for cyclicals and SMIDs because they are more economically-sensitive. We also expect a strengthening global economy to lift interest rates, helping Financials.
  • Fixed Income/Low Volatility could lag:  With uncertainty, defensive asset classes have been afforded premium valuations. As uncertainty fades, we expect that premium to fade.


In our view, a tug of war is currently playing out in the market with regard to recent news events:

  • On one side of the rope are the worries, namely:  Impeachment and Iran
  • On the other side of the rope are the opportunities: a signed Phase-1 trade deal with China and a ratified USMCA (sometimes referred to as the ‘new NAFTA’).  Both trade deals are expected over the coming weeks.

Thus far, the ‘opportunities’, in our view are winning. The fact that equity markets continue to shrug off the worries reminds us of James Carville’s famous quote: ‘It’s the economy, stupid.’  In other words, when investors are faced with competing news, the news that contains clear economic consequences tends to be where investors pay the greatest attention.

In addition to the gains already accruing to equity holders, we have observed two additional positives coming from the ‘tug of war’:

  1. The market’s resilience is a signal that significant underlying demand exists to buy equities, and that sidelined investors are starting to chase the market, in our view.
  2. Continuing worries such as impeachment and Iran add additional bricks to the ‘wall of worry’ that has historically been a pre-requisite for continued equity advancement. We believe that a formidable ‘wall of worry’ keeps investors from becoming overly optimistic, which can create dangerous bubbles.


Rising markets should be a tailwind for our global allocation portfolios, in our opinion. In keeping with our cautiously optimistic outlook, our balanced portfolios with horizons of longer than 5 years are currently roughly 6 percentage points overweight equities.

This article was written by the team at RiverFront Investment Group, a participant in the ETF Strategist Channel.

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Information or data shown or used in this material is for illustrative purposes only and was received from sources believed to be reliable, but accuracy is not guaranteed.

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