The outlook for a comprehensive U.S.-China trade deal remains uncertain at best, and continuing trade, political, and economic tensions are likely to persist long after the 2020 U.S. elections are over, observes Samantha Azzarello, a global market strategist with JPMorgan Asset Management, which has $1.7 trillion in assets under management (AUM). The current market "feels like purgatory for investors," she remarked in an extensive interview with Business Insider. "Cobbling together a stable, diverse income stream is the thing to be doing if you're an investor," she added.

Azzarello recommends these 4 key strategies: purchasing international stocks, putting money in short-term instruments such as short-term CDs and money market funds, buying preferred stock, and favoring stocks with a history of dividend growth. Meanwhile, international banking giant Societe Generale also recommends dividend growers, but is more positive on U.S. equities in general than Azzarello of JPMorgan, per another BI story.

Key Takeaways

  • A JPMorgan strategist sees pressures on stocks lasting beyond 2020.
  • She recommends cautious, income-oriented investing right now.
  • The odds for a mild recession in 2020 appear to be growing.
  • A trade deal is unlikely to eliminate all U.S.-China tensions.

Significance for Investors

Azzarello says that investors feel especially confused, given that the ranges of possible outcomes, from good to bad, appear to be getting increasingly wider in trade, U.S. politics, and the global economy. As a result, global trade, consumer spending, and business confidence are likely to be depressed in 2020 and beyond.

She advises investors to be patient and cautious, not taking overweight positions, but keeping their portfolios balanced and tilted towards income generation. Summaries of her 4 strategies follow.

Buy international stocks. "Overall international exposure provides a good yield and is diversified," Azzarello told BI. She notes that the MSCI All Country World Index ex-US has a dividend yield of 3.5%, versus just 2.1% or the S&P 500. The SPDR MSCI ACWI ex-US ETF (CWI) does better still, yielding 4.32%, per eftdb.com.

Buy short-term instruments. Azzarello suggests reducing equity exposure and waiting for more stability and better opportunities. Various FDIC insured money market accounts and 1-year CDs yield 2% or more, per Bankrate.com.

Buy preferred stocks. Preferred stocks offer less upside potential than common stocks, but pay higher dividends and have less downside. Azzarello recommends "fixed-for-life" preferreds, which guarantee set dividends, rather than "fixed-to-float" preferreds, which can reduce their dividends.

Buy dividend growers. "Growing your dividend actually makes your stock more attractive," Azzarello said. Indeed, as dividends grow, so does the effective yield on your initial investment.

Sophie Huynh, a cross asset strategist at Societe Generale, told BI that she expects the U.S. to be in a mild recession by 2Q 2020. However, she believes that the downside for U.S. stocks will be limited by the Federal Reserve's interest rate cuts, and well as dividends that will attract income-oriented investors.

Huynh finds that U.S. stocks tend to outperform non-U.S. stocks for more than a year after the Fed initiates a cycle of interest rate cuts, and she recommends stocks with a history of dividend growth, like Azzarello of JPMorgan. She also finds better value in emerging market stocks than big U.S. tech firms, which are drawing regulatory scrutiny, facing new tax rules that may reduce profits, and facing pressures on earnings growth. Finally, Huynh prefers the large cap S&P 500 to the small cap Russell 2000 on the basis of its being less leveraged, in general, amid concerns about high levels of corporate debt.

Looking Ahead

Ron Temple, the head of U.S. equity at Lazard Asset Management, warns that recent excitement about the prospects of a U.S.-China trade deal is misplaced. "A lot of investors are underestimating the difficulty and potential severity of that national security-related part of the relationship, and underestimating what it means when you go from just being economic competitors to basically strategic adversaries," Temple told BI, in another report. "Even if we do reach some kind of a deal, the question then is when the U.S. accuses China of having cheated," he added.

"Even if we get some near-term deal, I think it's unlikely that you see the tariffs that have been put in place go away," Temple continued, noting that he believes that a mild recession is likely. "It might be something really short and shallow, but the impact on corporate earnings tends to be a lot more significant than that would imply. And if you've got relatively elevated valuations in many parts of the market, there's not a lot of room for error," he warned.