Each year-end marks the beginning of the market prognostication game for the year ahead – and this year is no different. Many market forecasters are expressing optimism about the 2020 stock market – and a continuation of the long-running bull market would certainly be welcomed by investors and financial professionals. Meanwhile, the equity team at Seeyond takes a differentiated approach, viewing the market through a risk-based lens that takes into account various factors that can be overlooked by pundits – including volatility, correlation, and investor behavior.

Where We are Now
US equities have returned an impressive 27% to December 2019 while international equities have returned over 17% over the same period. Equity markets have been volatile at times but have, overall, followed a clear pattern to the upside. Year-end euphoria has been buoyed by increasing optimism around a potential piecemeal resolution of the US-China trade war, a continuation of global economic growth and investor expectations of further monetary easing.

In addition, CEO sentiment appears to remain positive, which has led to robust merger and acquisition activity – evidenced in part by LVMH’s purchase of Tiffany & Co. and Charles Schwab’s offer to purchase TD Ameritrade. Over the past 20 years, the fourth quarter has historically yielded the greatest increases for stock markets – an average increase of about 3.7% globally over that time period. This seasonality may partly explain the robust returns investors have experienced, which are helping fuel euphoria going into year-end.

Reasons for Vigilance
This late-year optimism stands in sharp contrast to the elevated volatility markets have experienced during the 23 months since the last significant market correction in January 2018. What’s more, there are other signs of market uncertainty afoot. There are signs that consumer and business confidence may have topped out – evidence in part by the ISM Manufacturing Index entering contraction territory as of late November. Accommodative monetary policy by global central banks may help to counter that reduction, but that doesn’t mean investors should ignore it.

The prospect of geopolitical uncertainty is likely to remain throughout 2020. It’s hard to know how markets might react to legislative elections in places like South Korea and Iran and presidential elections occurring in Greece, the US, and elsewhere. Global monetary and fiscal policy will likely remain a wild card as policymakers in many countries contend with contradictory inflation data and political unrest.

Volatility vs. Uncertainty
Nine out of ten respondents to the 2019 Natixis Investment Managers Global Survey of Individual Investors say it’s important to protect their assets in volatile times, while six in ten report that volatility undermines their ability to achieve savings and investment goals.1 While investors can recognize significant upticks in volatility when they occur, market uncertainty – a leading indicator of potential volatility – is a less understood phenomenon. As ever, investors should be on guard against forgoing risk considerations in favor of performance chasing.

Range Finding
Assuming business fundamentals stay the course – not great but not negative – our expectation is that markets will be modestly up in 2020, but could well experience a “roller coaster” pattern, meaning they start and end at approximately the same place but experience episodes of turbulence along the way, which can weigh on investors.

Consumer confidence will likely remain a major market wild card. While strong consumer spending might result in new market highs, they could well be range bound, translating into a modest overall upside. Additionally, we continue to worry about consumer spending running dry, which could precipitate the next phase in the cycle.

International Opportunities
Investors and financial professionals may want to take note of the fact that over the past 20 years, international markets have grown an average of 8% in years following strong fourth quarter increases – or fourth quarters where the market was up over 6%.

Given average market return expectations and increasing market headwinds in an already protracted recovery, investors would be wise to re-assess their portfolios with a lens toward overall portfolio risk. Keeping in mind the potential for a continuation of growth in both economy and global markets, actively managed strategies, which are designed to participate in market upsides while providing resilience in the face of volatility, can be an attractive diversifier through uncertainty in this late cycle.
1 Natixis Investment Managers 2019 Global Survey of Individual Investors, conducted by CoreData Research February and March 2019. Survey included 9,100 respondents in 25 countries.

Exchange-traded funds (ETFs) trade like stocks, are subject to investment risk, and will fluctuate in market value. Unlike mutual funds, ETF shares are bought and sold at market price, which may be higher or lower than the ETF’s net asset value. Transactions in shares of ETFs will result in brokerage commissions, which will reduce returns. Unlike typical exchange-traded funds, there are no indexes that the Fund attempts to track or replicate. Thus, the ability of the Fund to achieve its objectives will depend on the effectiveness of the portfolio manager. There is no assurance that the investment process will consistently lead to successful investing. Volatility management techniques may result in periods of loss and underperformance, may limit the Fund's ability to participate in rising markets and may increase transaction costs. Equity securities are volatile and can decline significantly in response to broad market and economic conditions. Foreign securities may involve heightened risk due to currency fluctuations. Additionally, they may be subject to greater political, economic, environmental, credit, and information risks. Foreign securities may be subject to higher volatility than US securities, due to varying degrees of regulation and limited liquidity. Currency exchange rates between the US dollar and foreign currencies may cause the value of the fund’s investments to decline.

All investing involves risk, including the risk of loss.

Diversification does not eliminate the risk of experiencing investment losses.

This material is provided for informational purposes only and should not be construed as investment advice. The views and opinions expressed above may change based on market and other conditions. There can be no assurance that developments will transpire as forecasted.

Before investing, consider the fund's investment objectives, risk, charges, and expenses. Visit im.natixis.com for a prospectus or a summary prospectus containing this and other information. Read it carefully.

Seeyond is a subsidiary of Ostrum Asset Management. Operated in the US through Ostrum Asset Management U.S., LLC. Ostrum Asset Management U.S., LLC and Natixis Distribution, L.P. are indirect subsidiaries of Natixis Investment Managers.