Global Portfolio Strategy | February 11, 2020

Data reported in January and early February reflected continued, moderate growth in the U.S. economy. U.S. manufacturing data improved from weak levels, defense drove durable goods order growth, and underlying data on the U.S. consumer and job growth was solid. The S&P 500 Index was flat for the month while the 10-year Treasury yield fell 0.31% basis points to 1.51% amid coronavirus outbreak fears.

Investment Takeaways

  • Our S&P 500 Index year-end 2020 fair value target is 3,250–3,300, based on a price-to earnings (P/E) ratio of 18.75 and our 2020 S&P 500 earnings forecast of $175 per share.* With stocks already at our target, a potential further stock market advance in 2020 may be limited.
  • We favor large cap stocks as the business cycle ages and recommend balanced exposure between the growth and value styles in equity allocations where suitable.
  • Attractive valuations and solid economic growth may favor emerging markets over foreign developed markets, although coronavirus impact is temporarily offsetting the benefits of the phase-one trade deal with China.
  • Slower but still solid economic growth and modest inflation may put upward pressure on yields, but geopolitical uncertainty and global appetite for U.S. Treasuries may keep yields range bound.
  • We favor a blend of high-quality intermediate bonds, focused on mortgage-backed securities (MBS), where appropriate, for a diversifying source of yield that may help mitigate risk of higher interest rates.
  • While economic growth is supportive of investment-grade corporates, we take a neutral view because of the tight credit spreads and declining credit quality.
  • The global stock rally continues to be buoyed by strong participation. With overly optimistic sentiment becoming a tactical risk, however, we see technical support near 3,030 on the S&P 500 Index.
  • Key changes from January’s report: Upgraded our views on financials and industrial metals to positive.

Our Asset Class & Sector Choices

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This material has been prepared for informational purposes only, and is not intended as specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors and they do not take into account the particular needs, investment objectives, tax and financial condition of any specific person. To determine which investment(s) may be appropriate for you, please consult your financial professional prior to investing. Any economic forecasts set forth may not develop as predicted and are subject to change.

Stock investing involves risk including loss of principal. Because of their narrow focus, sector investing will be subject to greater volatility than investing more broadly across many sectors and companies. Value investments can perform differently from the market as a whole and can remain undervalued by the market for long periods of time. The prices of small and mid‐cap stocks are generally more volatile than large cap stocks. Bonds are subject to market and interest rate risk if sold prior to maturity.

Bond values will decline as interest rates rise and bonds are subject to availability and change in price. Corporate bonds are considered higher risk than government bonds. Municipal bonds are subject to availability and change in price. Interest income may be subject to the alternative minimum tax. Municipal bonds are federally tax‐free but other state and local taxes may apply. If sold prior to maturity, capital gains tax could apply. U.S. Treasuries may be considered “safe haven” investments but do carry some degree of risk including interest rate, credit, and market risk. Bond yields are subject to change. Certain call or special redemption features may exist which could impact yield.

Mortgage backed securities are subject to credit, default, prepayment, extension, market and interest rate risk.

Credit Quality is one of the principal criteria for judging the investment quality of a bond or bond mutual fund. Credit ratings are published rankings based on detailed financial analyses by a credit bureau specifically as it relates the bond issue’s ability to meet debt obligations. The highest rating is AAA, and the lowest is D. Securities with credit ratings of BBB and above are considered investment grade. Duration is a measure of the sensitivity of the price (the value of principal) of a fixed‐income investment to a change in interest rates. It is expressed as a number of years.

Alternative investments may not be suitable for all investors and should be considered as an investment for the risk capital portion of the investor’s portfolio. The strategies employed in the management of alternative investments may accelerate the velocity of potential losses.

Commodity‐linked investments may be more volatile and less liquid than the underlying instruments or measures, and their value may be affected by the performance of the overall commodities baskets as well as weather, geopolitical events, and regulatory developments. The fast price swings in commodities and currencies will result in significant volatility in an investor’s holdings.

Investing in foreign and emerging markets securities involves special additional risks. These risks include, but are not limited to, currency risk, geopolitical risk, and risk associated with varying accounting standards. Investing in emerging markets may accentuate these risks. All information is believed to be from reliable sources; however, LPL Financial makes no representation as to its completeness or accuracy.

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