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S&P 500 Tops 3, 200: What Lies Ahead for ETFs in 2020?

Sanghamitra Saha

The Santa Rally has taken control of Wall Street fully as the key U.S. index S&P 500 has crossed the 3,200-mark for the first time.  Though still not out of woods, the U.S. economy has been showing signs of improvement. The so-called “inverted yield curve,” which gives signals of an impending recession, reverted back to normal in the fourth quarter. Trade tensions have eased a lot with the announcement of phase-one U.S.-China and USMCA trade deal.

With this, investors’ confidence in the global economy returned. U.S. Treasury Secretary Steven Mnuchin said the USMCA deal will likely contribute 0.5% to GDP growth. The Atlanta Fed’s GDPNow model estimates that the U.S. economy will likely to expand 2.3% in the fourth quarter, up from the third quarter’s growth of 2.1%.

The Fed has already enacted three rate cuts this year and has indicated no further hikes in 2020. Incessant cheap money inflows will likely strengthen stocks further. Investors should also note that though there are pockets of weakness, the U.S. economy is better positioned than most developed economies. Global policy easing has also been ample. This should be favorable for stock investing (read: A Look Back At S&P 500 Sector ETFs in 2019).

Trump’s impeachment talks could not derail the market momentum as the impeachment does not carry any adverse impacts on fiscal or monetary policy, rather can bring about some positive developments on the trade deal front.

What Lies Ahead for the S&P 500 in 2020?

The S&P benchmark tends to record gains 83% of the time, with an average annual return of 11.2% following a year in which it jumped at least 20%, per historical data, quoted on MarketWatch.

Concerns do exist. Overvaluation concerns, worries about the stage of the economic cycle, U.S. presidential election, Brexit uncertainty and still-not-smooth U.S.-China trade relation are some of the headwinds (read: US Economy in "Late-Cycle" Phase? ETFs to Play).

“A 10% stock market correction in 1H20 is possible; we can envision one in late March/early April when the Fed’s balance sheet possibly stops growing,” per Wells Fargo’s Chief Equity Strategist.

A MarketWatch survey shows that 14 out of 18 Wall Street strategists see upside in the S&P 500 in 2020 from here with Piper Jaffray being the most bullish (12.5% gains). Deutsche Bank’s projection equates to flat returns. Three research houses including Invesco, Morgan Stanley and UBS Group see decline in the S&P 500.

Still, positive sentiments are overpowering the broader market. J.P.Morgan’s strategist estimated the cumulative damage from only tariffs slowed 2019 earnings per share growth to just 1%, from an estimated 8% increase in the absence of import duties. In the event of a full-fledged trade deal, EPS would record an increase of 12% a year.

JPMorgan’s said earnings growth “likely bottomed in 3Q and should stabilize in 4Q [of 2019], followed by an earnings recovery in 1H20 (+5%) and stronger growth in 2H20 (+10%).” J.P. Morgan projected the S&P 500 to hit 3,400 in 2020, marking 6.3% gains from here.

So, all in all, one can expect continued gains in the key U.S. index S&P 500 in 2020, thoughgains will be lower than this year, even in the best-case scenario (read: S&P 500 ETFs & Stocks to Buy on a Likely Great Rotation).

ETFs in Focus 

Vanguard S&P 500 ETF VOO

The underling S&P 500 Index measures the performance of the large-capitalization sector of the U.S. equity market. The fund has a Zacks ETF Rank #2 (Buy). It yields 1.41% annually (read: ETF Asset Report of Q3).

SPDR Portfolio S&P 500 High Dividend ETF SPYD

The underlying S&P 500 High Dividend Index is designed to measure the performance of the top 80 dividend-paying securities listed on the S&P 500 Index, based on dividend yield. The Zacks Rank #2 ETF yields 4.28% annually (read: 5 Amazing ETF Strategies for the Fourth Quarter).

iShares Core S&P 500 ETF IVV

The S&P 500 Index measures the performance of the large-capitalization sector of the U.S. equity market. The Zacks Rank #2 fund yields 2.11% annually.

Ultra S&P500 ETF SSO

Investors with a strong stomach for risks, may play leveraged ETFs. The underlying ProShares Ultra S&P500 seeks daily investment results, before fees and expenses, that correspond to twice (200%) to the daily performance of the S&P 500. The fund charges 90 bps in fees (read: Wall Street Hits Record High: Leveraged ETFs to Play).

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SPDR Portfolio S&P 500 High Dividend ETF (SPYD): ETF Research Reports
ProShares Ultra S&P500 (SSO): ETF Research Reports
iShares Core S&P 500 ETF (IVV): ETF Research Reports
Vanguard S&P 500 ETF (VOO): ETF Research Reports
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