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What will Drive Risk Assets in 2020?

Executive Summary

  • From our perspective, one of the biggest stories in 2019 was the U.S. Federal Reserve’s complete reversal in interest rate policy. At the start of 2019, the U.S. Federal Reserve had multiple interest rate hikes into its economic forecasts. However, by the end of the year, the Committee actually lowered interest rates three times. Moreover, the U.S. Federal Reserve’s balance sheet wound up expanding towards the end of the year.

  • As the chart below shows, the U.S. Federal Reserve’s balance sheet has been highly correlated with the increase in the S&P 500 Index level since 2010.

Source: Bloomberg, Astoria Portfolio Advisors.

  • Additionally, the U.S. and China agreed to sign a phase one trade deal on January 15, 2020 which further eased trade uncertainty globally. The highlights of the deal are that China agreed to purchase additional U.S. agricultural and exported goods, and the U.S. cancelled additional tariffs on Chinese imports. Investors should keep in mind the next phases of a trade deal will require additional negotiations and could result in future uncertainty.

  • Due to the U.S. Federal Reserve interest rate cuts along with progress on the U.S. and China trade policy, the S&P 500 Index increased by 9.06% in the fourth quarter. For the entire 2019 calendar year, the S&P 500 Index produced a total return of 31.48%.

  • We continue to advocate a globally diversified portfolio across stocks and bonds. Moreover, we strongly believe sticking with a long-term investing plan will increase the probability of accomplishing one’s financial goals.

  • We recently released our 2020 portfolio construction outlook (click here).

U.S. Federal Reserve & Yield Curve

  • In order to stimulate U.S. economic activity, the U.S. Federal Reserve lowered interest rates three times in the past five months. Moreover, the U.S. Federal Reserve suggested it will most likely pause cutting interest rates further.

  • In the past several commentaries, we highlighted the extent to which an inverted U.S. interest rate curve has historically coincided with a pending economic recession in the U.S. The inversion did not lead to a recession in 2019, but that does not eliminate the probability of one occurring in the nearby future.

  • As of September 2019, the spread between the U.S. 3-month interest rate vs. 10-year interest rate was negative. That spread now currently stands at 36.36bps as of December 31, 2019. This is a healthy sign but as mentioned above, it does not remove the probability of a recession occurring in the future.

Source: Bloomberg, Astoria Portfolio Advisors.

  • The NY Federal Reserve Bank maintains a Recession Probability Index for the next 12 months ahead. As of December 31, 2019, the NY Federal Reserve’s Recession Probability Index stands at 21.35% and remains at its highest level since the Great Financial Crisis of 2008 (see chart below).

Source: Bloomberg, New York Federal Reserve, Astoria Portfolio Advisors.

Economic Data, Valuations, and Portfolio Construction

  • The J.P. Morgan Global Manufacturing Purchase Managers Index, which is a measure of economic health for the manufacturing and service sector, saw an increase in the fourth quarter (see chart below). This is noteworthy as the index has been steadily declining since January 2018.

Source: Bloomberg, J.P. Morgan, Astoria Portfolio Advisors.

  • The Atlanta Fed GDPNow Forecast Model currently stands at 2.43% as of December 30, 2019.

Source: Bloomberg, Atlanta Federal Reserve Bank, Astoria Portfolio Advisors.

  • The Morgan Stanley Business Conditions Index rose four points in December to an index level of 52 and remains solidly above the mid teen / low 20 index level from mid- summer.

Source: Morgan Stanley Research.

International Equities

  • International Developed and Emerging Markets equities have posted strong positive returns in 2019. The Euro STOXX 50 Index (Europe) rose by 30.12% (in Euro terms), the Shanghai Stock Exchange Composite Index (China) increased by 24.88% (in CNY terms), the Nikkei 225 Index (Japan) climbed 20.69% (in Japanese Yen terms), and the MSCI Emerging Markets Index was up 19.42% (in USD terms).

Source: Bloomberg, Astoria Portfolio Advisors.

  • The Bloomberg Dollar Spot Index (BBDXY) decreased by 0.93% in 2019. As we have mentioned in previous commentaries, international equities remain attractive for long term investors as they are trading at a notable valuation discount compared to the U.S. stock market. According to, the iShares MSCI ACWI ex U.S. ETF (ACWX) currently has a P/E ratio of 14.81x based on 2020 analyst estimates. This is significantly lower than the SPDR S&P 500 ETF (SPY) which has a P/E ratio of 20.96x based on 2020 analyst estimates.

  • In the below table, we show 1-year returns, 2020 EPS estimates, ROE, ROA, and PE ratios for the following ETFs: iShares Edge MSCI USA Quality Factor ETF (QUAL), iShares S&P 500 Value ETF (IVE), iShares Edge MSCI USA Size Factor ETF (SIZE), iShares Edge MSCI Min Vol USA ETF (USMV), iShares Edge MSCI USA Momentum Factor ETF (MTUM), and iShares Select Dividend ETF (DVY).

  • Over the past 1 year, the best performing long-only factor ETFs are QUAL (+35%), IVE (32%), and SIZE (30%).

Source:, Astoria Portfolio Advisors. Data accessed on January 3, 2020.

Fixed Income

  • Yields on the 2-year, 10-year, and 30-year U.S. Treasury Bonds were 1.57%, 1.92%, and 2.39% respectively as of December 30, 2019. The Bloomberg Barclays U.S. Aggregate Bond Index was up 8.72% on a total return basis in 2019.

  • We continue to prefer owning higher-quality U.S. bonds across our ETF portfolios. We maintain an overweight position in U.S. municipal bonds and U.S. mortgage-backed securities, both of which are highly rated. Over 75% of our fixed-income bonds are rated either AAA or AA.


  • Commodities posted mixed returns in 2019. The GraniteShares Bloomberg Commodity Broad Strategy No K-1 ETF (COMB), which is a broad-based index of energy, oil, metals, and agriculture, increased by 7.02%. Meanwhile, the United States Oil ETF (USO) increased by 32.61%, the Invesco the SPDR Gold ETF (GLD) rose by 17.86%, the Invesco DB Agriculture ETF (DBA) declined by 0.70%, and the DB Base Metals ETF (DBB) fell by 1.16%.

Source: Bloomberg, Astoria Portfolio Advisors.

  • The Federal Reserve Bank of New York maintains an inflation gauge estimate based on various CPIs and macroeconomic variables & fundamentals. As of November 30, 2019, the gauge estimates inflation to be 2.35%. This index appears to have stabilized after steadily declining for most of 2019.

Source: Bloomberg, New York Federal Reserve, Astoria Portfolio Advisors.

Market Timing

  • Our long-standing view is that timing the market is extremely difficult and that investors are incentivized to stay fully invested. 2018 and 2019 proved our point. The S&P 500 Index declined 13.52% in the fourth quarter of 2018 and rallied 31.48% in 2019. We continue to advocate not only to stay fully invested, but to maintain a globally diversified portfolio of stocks and bonds.


Nick Cerbone

Astoria Portfolio Advisors Disclosure: As of the time this report was written, Astoria held a position in SPY, QUAL, IVE, USMV, MTUM, COMB, GLD, GLDM, and IAU. Note that this is not an exhaustive list of our holdings across our ETF portfolios, model delivery services, or client accounts. Our holdings will vary depending on risk tolerances, tracking error bands, and client mandates. For full disclosure, please refer to our website.


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