Outlook 2020: Will Bulls Forge Ahead?

Jed Graham of Investor's Business Daily reports on the stock market forecast for 2020 stating clears skies from the Fed, China trade deal but 2020 election clouds loom:
The stock market forecast for 2020 looks bright to start the new year. The Dow Jones Industrial Average, S&P 500 and Nasdaq composite hit record high after record high in late 2019. The stock market rally kicked into higher gear as the Fed switched to cutting rates and a China trade war truce took hold.

Stock market bulls are betting that business investment, corporate earnings and emerging market economies will now revive. The momentum for the stock market rally and Trump economy should carry through at least mid-2020. Then Wall Street will turn its focus to the outcome of the 2020 election — with the risk of a major U-turn in tax and regulatory policy — and reassess the chances of a new Fed rate-hike cycle.

Apple (AAPL) and chips such as Advanced Micro Devices (AMD) and Nvidia (NVDA) are expected to continue to lead the stock market rally into the new year as a "5G supercycle" gets underway. Plus, the breadth of leadership is bullish for the stock market forecast for 2020.

Vertex Pharmaceuticals (VRTX) and other biotechs are leading a healthy medical sector. JPMorgan Chase (JPM) and other bank stocks are depositing fat gains, while Mastercard (MA) and payment stocks look solid. Microsoft (MSFT) and Adobe (ADBE) are faring well as software stocks try to reclaim leadership. Even Caterpillar (CAT) and many industrial and cyclical names are reviving. While the retail climate remains challenging, standouts from Alibaba (BABA) to Target (TGT) are thriving.

Stock Market Forecast 2020: Bad News Is Good News

In late 2018, recession fears grew as the China trade war escalated and the Federal Reserve continued to hike interest rates despite signs of slowing economic growth and a sharp stock market correction.

Fast forward to the end of 2019, and policymakers have reversed course, with a trio of Fed rate cuts and a generous dose of new asset purchases fueling stock market gains. Meanwhile Trump's China trade war has culminated in a phase-one China trade deal, avoiding tariffs on the Apple iPhone and turning this year's recession threat into next year's economic stimulus.

Is The Stock Market Forecast For 2020 A Repeat Of 2017?

Suddenly, the stock market rally is looking a lot like 2017. Back then, the prospect of Trump tax cuts and deregulation, helped along by a broad upturn in global growth, fueled a remarkably smooth stock market rally. The S&P 500 index had very few days with gains or losses of 1% or more.

Since the stock market rally revived in early October, the major indexes have been in a strong, steady ascent, with only a modest post-Thanksgiving pause. While a tranquil bull may be hard to sustain for another 12 months, current conditions are positive for the 2020 stock market forecast.

There is always the risk of the unexpected. Many Wall Street firms worry that lack of clarity about China trade deal terms leaves room for disappointment in the stock market forecast for 2020. Yet the big current risk for investors seems to be missing out on a potential stock market melt-up.

Is Wall Street too sanguine about the staying power of tame inflation, low interest rates and the economic expansion? Peter Berezin, BCA Research chief global investment strategist, thinks so. He sees an inflation threat emerging that could derail the expansion by the end of 2021.

But, even if he's right, Berezin is bullish about the stock market forecast for 2020.

"The second-to-last year of a business cycle expansion tends to generate outsized returns," he told clients on a Dec. 18 conference call. "We may be entering this blowoff phase for global equities."

Stock Market Outlook: No Technical Red Flags

Wait a second: Are we potentially entering a blowoff stock market phase or have we been in one all year? With the Dow Jones up 22.1%, the S&P 500 index 28.6% and the Nasdaq composite 34.9%, it's a fair question.

Yet, despite a decadelong secular bull market, technical analysis suggests that Wall Street hasn't yet gotten carried away.

One key metric tracked by IBD is the 5-year gain in the S&P 500. While powerful rallies interspersed two significant market corrections over the past five years, stocks spent the bulk of the period marking time. Stocks essentially went nowhere from the end of 2014 until Trump's surprise election victory in November 2016.

Then, after the tax-cut-fueled rally peaked in late January 2018, the China trade war and Fed rate hikes kept the stock market rangebound. The S&P 500 trudged another 21 months before decisively breaking above prior levels in October.

The S&P 500 index is only up 57% over the past five years. That compares to an 89% gain at the 2007 peak and a whopping 210% at the 2000 peak.

Margin Debt Tame, Valuations Aren't Stretched

Margin debt can also signal when the stock market has become dangerously frothy. Year-over-year margin debt growth in excess of 55% would raise a red flag. By comparison, the latest data shows margin debt down nearly 9%.

Valuations have gotten richer over the past year as the S&P 500 surged while earnings flatlined.

S&P 500 earnings per share are projected to rise 9.6% in 2020, as revenue grows 5.4%, according to FactSet Research. Year-ahead estimates generally prove a bit too bullish.

"Stocks aren't cheap," said Ed Yardeni, chief investment strategist at Yardeni Research. Yet above-average valuations make sense "when investors don't see a recession in sight" and low bond yields make equity returns look more attractive on a relative basis.

As of Dec. 20, the S&P 500 traded at 18.2 times 12-month forward earnings. Yardeni said he'd be worried about a correction if the forward price-earnings ratio exceeds 20, which it hasn't done since early 2002.

That threshold could be in play, if the S&P 500 melts up early in 2020 to his year-end 3500 target. Yardeni sees that as a possibility.

Will Fed Rate Cuts, Trade Deal Lead To Global Rebound?

The bull case for the stock market forecast for 2020 hinges on a moderate global economic rebound. That's not a given. Some economists doubt that Fed easing will pack much punch and fret that the phase-one China trade deal may do little to unwind tensions holding back business investment. But those doubts mean that all the good news may not be priced in: There's still a wall of worry for the stock market rally to climb.

Prospects for a global upturn look pretty good as numerous headwinds fade and tailwinds pick up. After a few years' divergence, the Federal Reserve, the European Central Bank and the Bank of Japan are working in concert. Central bank bond buying has helped push global equities markets higher. The U.S. dollar has eased off its recent perch, a positive for emerging market economies encumbered by dollar-denominated debt.

"Our upside case for next year seems to be playing out," said Michael Crook, head of Americas investment strategy at UBS Global Wealth Management.

China Trade Deal Buoys Economic, Stock Market Outlook

UBS went overweight equities after the U.S. and China agreed to a trade deal, including a slight tariff reduction, on Dec. 13. The biggest impact of the phase-one China trade deal "comes from removing the downside," Crook said.

While tariffs have caused disruption, the big fear has been that a full-fledged China trade war would morph into a technological cold war, driving a wedge between the globe's biggest economies.

Instead, the global economy got a double-dose of relief this month. Not only is there a China trade deal with tariffs coming down, but the odds of a disruptive, no-deal Brexit have faded with Prime Minister Boris Johnson's Conservative party winning a majority.

Monetary Policy Is Global Tailwind

As those clouds part, the Jedi force of monetary policy may prevail once more, before its power is spent. Lower mortgage rates, tied to easier Fed policy, already have re-energized the U.S. housing sector. In November, building permits hit 1.4 million units at an annual rate, the highest since 2007. Homebuilder confidence is at a 20-year high. Treasury yields have risen in recent months, but are still historically low.

Globally, reduced uncertainty, easier credit and modest fiscal stimulus — in Europe, China, South Korea and Japan — should get traction.

The auto market, which has been in reverse, is a wild card. The transition to more exacting emissions standards, reduced government incentives and economic softness cut into global sales, with pronounced weakness in Europe and China. But European sales have turned positive off a depressed base. Chinese sales are expected to follow suit in 2020.

The recent news that Boeing will suspend 737 Max production is expected to cut up to a half-point from U.S. GDP growth in the first quarter, depending on how long it lasts. But that temporary lull could keep pressure on the dollar, providing more fuel for emerging markets.

2020 Election Risk: Will Wall Street Fear Trump Loss?

Fed easing and the China trade deal have lit a fire under financial markets and put a spring in the U.S. economy's step.

U.S. growth should remain solid up through the 2020 election, with the unemployment rate holding near a 50-year low. While a strong economy and stock market rally won't assure President Trump of reelection, it will make him hard to beat. Trump now leads all but one of the major Democratic contenders in the latest IBD/TIPP Poll. That exception is Joe Biden, and even there Trump is closing the gap.

That means there's no immediate reason for Wall Street firms to begin pricing in a Trump loss — or loss of GOP Senate control — in the 2020 election.

That's probably good news for the stock market forecast for 2020 — even though the Dow Jones has fared well under Democratic presidents. Why? Democratic candidates in the 2020 election cycle — including front-runner Biden — all want to substantially reverse Trump's big corporate tax cut, which slashed effective tax rates for S&P 500 companies by roughly one-third.

It's hard to argue that a direct hit to earnings is anything other than a clear negative for share prices.

Several candidates seek to raise tax revenue far above Obama levels, with Elizabeth Warren and Bernie Sanders both calling for a wealth tax.

2020 Democrats Have Big Policy Agenda

Sanders and Warren also have called for a ban on fracking. While most fracking is on private land, exacting regulation could blow up energy prices and depress big swathes of the U.S.

The two left-wing contenders also endorse "Medicare for All." More traditional liberal candidates favor a public option, but the sweeping health care reforms would have a dramatic impact on providers, insurers and millions of jobs.

Warren has called for breaking up Big Tech giants such as Facebook (FB). Even without control of the Senate, a Democratic president could enact big policy changes on antitrust and a wide range of other corporate issues via regulation and enforcement.

Democrats also generally support drug price controls that could roil Big Pharma and biotechs.

There still could be a white-knuckle period for investors and corporate CEOs if the White House and Senate 2020 election contests look like a coin flip. But it probably won't happen at least until the party conventions next summer.

In the meantime, the strong economy — and rising Trump support — could convince Democratic primary voters to shy away from more left-wing candidates, whose economic prescriptions and control of the regulatory state could be more disruptive for business.

The Outlook For Inflation, Interest Rates And Fed Policy

The Fed will be on hold, at least through the 2020 election. Yet interest rates are still a wild card. Depending on the path of inflation and unemployment, investors could begin to price in Fed rate hikes for 2021.

If growth solidifies, longer-term market rates will rise on expectations for future Fed hikes and higher inflation.

After all, 12 of 17 policymakers penciled in a Fed rate hike for 2021 in their December projections.

Yet another dovish turn isn't out of the question. Trump still could influence policy with appointments to two open Fed governor seats. Meanwhile Chairman Jerome Powell will oversee an updated strategy for achieving the Fed's 2% inflation target. The midyear update could explicitly encourage inflation overshoots to offset long periods of sub-2% inflation.

Bottom line: Inflation and upward pressure on interest rates could be a story for the second half of the year, but don't count on it.

Stock Market Outlook 2020: Which Sectors, Regions Will Thrive?

At the moment, there's not much to fear except that stocks will get ahead of themselves. How can individual investors participate? IBD outlines a 3-step guide for self-directed investors. That starts with a check of the stock market trend, which is flashing a green light: Confirmed uptrend. Step 2 is using IBD Stock Lists to identify top stocks to buy and watch. Step 3 involves using IBD Stock Checkup to help winnow out the wheat from the chaff and IBD stock charts and analysis to identify proper buy points so you're ready to seize opportunities.

A broad-based upturn in global growth would lift almost all boats, including the unloved energy, mining and heavy equipment sectors. There are some promising signs, with copper and oil prices both near their highest levels since May. Southern Copper (SCO) and Caterpillar stock are both near buy points.

BCA's Berezin thinks emerging markets are poised to reverse some of their long underperformance, as global uncertainty abates, China applies fiscal and credit stimulus, and manufacturing recovers. A softer dollar, also key to his outlook, would give an extra lift to profits earned in foreign currencies.

The 5G Supercycle: Apple Stock To Nvidia To Verizon

A key catalyst in 2020 and beyond will be the launch of 5G wireless networks. Their dramatically faster speeds, greater capacity and near-instant connections are seen as key to autonomous driving and other transformative applications. Verizon Communications (VZ), AT&T (T), T-Mobile US (TMUS) and Sprint (S) have begun deploying 5G networks. China, South Korea and Japan are among the early adopters. But those are expensive upgrades.

So the money, and the stock market gains, may be in the 5G hardware. Apple stock and the broader chip sector have surged in 2019 on expectations for a 5G wireless upgrade cycle, even as many of these names had stagnant or tumbling earnings in recent quarters.

Apple iPhones released next fall should be 5G ready. On Dec. 23, Wedbush hiked its Apple stock price target, saying iPhone demand should surge 10% as a huge upgrade cycle gets underway.

Chipmakers with 5G exposure include AMD stock and Nvidia stock to Apple iPhone suppliers such as Qualcomm (QCOM), Qorvo (QRVO) and Skyworks Solutions (SWKS).

Just as Nvidia stock and others tend to rally ahead of demand, they can peak before earnings deteriorate. But the 5G upgrade cycle could last for years.

Medicals Are In Good Health

The vast, varied medical sector is thriving. With "Medicare for All" fears fading, health insurers, hospitals and other medical service firms are rallying after tumbling for much of 2019. With drug-price controls off the table, FDA approvals accelerating and M&A heating up, biotech stocks are soaring after lagging for years. Vertex stock, Crispr Therapeutics (CRSP) and Amgen (AMGN) are faring well, while a slew of smaller names have skyrocketed on positive drug news.

Medical product and devices makers also doing well, including Dexcom (DXCM) and Edwards Lifesciences (EW).

Bank Stocks Ride Yield Curve Wave

Financial stocks have already "had a good run since the yield curve flipped," but remain relatively cheap, Yardeni said.

Banking giants have been long-term laggards vs. the S&P 500 index. But JPMorgan Chase stock and peers are enjoying a run amid an easy Fed, firming economic growth and widening Treasury yield spreads. With the Fed anchoring short-term rates, net interest margins will benefit as long-term rates keep rising.

Payment Stocks

Payment stocks are quietly improving, with Mastercard stock breaking out and archrival Visa (V) back in a buy zone. Fiserv (FISV) is just out of range, while Global Payments (GPN) is in a buy zone.

All of these payment stocks look strong. None look like screamers now, but several have been huge long-term leaders, notably Mastercard stock, Visa and Fiserv.

Retail: Thrive Or Die

With unemployment at a 50-year low and decent economic growth going forward, wage and job growth should continue to fuel solid consumer spending. But the spoils won't be shared equally. Department stores and mall-based chains continue to reel and even mass-disruptor Amazon.com faces some challenges.

But there are notable pockets of strength. Target stock has soared as the big-box discounter delivers accelerating growth from a hybrid model of physical and online sales. So have Walmart, Best Buy and Costco Wholesale to varying degrees. Off-price discounters like Burlington Stores (BURL) and salvage vehicle auctioneer Copart (CPRT) remain steady growers, while Lululemon Athletica (LULU) and RH (RH) are thriving among upscale customers. Chipotle Mexican Grill (CMG) is among a handful of tasty restaurant stocks.

Broadening out to consumer discretionary, Nike (NKE) is benefiting from solid U.S. and Chinese demand.

Speaking of China, Alibaba stock is surging, while several other China internets are looking better.

Communications Sector

The revamped S&P 500 communications services sector includes Google-parent Alphabet (GOOGL), Facebook, Disney (DIS) and Netflix (NFLX), in addition to old staples Verizon and AT&T.

FactSet Research says the communications services sector is forecast to lead all 11 S&P sectors in 2020 with 9.1% revenue growth, vs. 5.4% for the entire S&P 500.

Despite antitrust concerns in the 2020 election cycle, Google stock is at record highs and Facebook stock is in a buy zone. Disney stock is just below a buy point while Netflix stock is lagging.

Can Software Bounce Back?

If business investment improves, that would be good news for software. The sector was the clear leader to start 2019 but faltered and is struggling to catch up.

Microsoft stock has a been a steady leader throughout 2019. But that largely reflects the Dow tech giant's booming cloud-computing services. Adobe stock and a few other software names such as Paylocity (PCTY) and Fortinet (FTNT) are marching higher. Shopify stock is almost back to new highs, which would be notable. Shopify (SHOP), an e-commerce software giant, is one of the clear stock market winners of 2019.

Stock Market Forecast 2020: No Crystal Ball

When it comes to the 2020 stock market forecast, investors can interpret, but don't try to predict. Right now, the action of the major indexes and leading stocks are favorable for the stock market outlook. So are economic conditions, with Fed policy, China trade and other big uncertainties receding into the background.

But the 2020 election could quickly alter stock market forecasts, especially if a left-wing candidate wins the Democratic nomination and appears headed for victory in November. A revived or new trade war or some surprise economic news or financial crisis could upend the 2020 market outlook.
It's time to write my Outlook 2020 and since I liked this article above, I posted it to give you a flavor of what to expect going into the new year and what to keep your eye on.

In order to do a proper Outlook 2020, I brought back Mr. X. to help me gather my thoughts and bring out the most important points.

Please note, Mr. X. is a figment of my imagination, not a stock market strategist I know. 

Below, you will read questions and answers between me and Mr. X.

L.K.: Looking back at 2019, what do you think were the main drivers of financial markets?

Mr. X.: Let's go back a year when you wrote three comments on The Fed Grinch which stole Christmas, The bad Santa selloff of 2018, and Making stocks great again.

You correctly predicted global pensions led by behemoths like Norway and Japan's pensions, were going to massively rebalance their portfolios to capitalize on the weakness of US stocks at the end of Q4 2018.

Importantly, the selloff last year was severe, prompting the Fed to do an 180 degree U-turn and  backtrack from its hawkish stance. In fact, your Outlook 2019 which you appropriately called When Doves Cry, you noted the following: "...going into the new year, I firmly believe the Fed is done raising rates and depending on how bad things got, we could see a possible rate cut and a stop to the reduction of the balance sheet."

Well, we got an inverted yield curve scare in August which sent global pensions reeling as rates plunged to new lows and then things stabilized until mid September when we got Quant Quake 2.0 and QE infinity after a lot of high beta stocks got clobbered.

Since then, the response of the Fed has been to inject massive liquidity into the repo markets and financial system. As you noted last week, the euphoria in US stocks this quarter can be explained by the Fed balance sheet which has increased considerably in recent months:

Clearly the recent rally in equities is due to the expansion of the Fed's balance sheet and this alone has driven equities higher, overshadowing any worries on the trade front.

L.K.: So what happens now? Will pensions rebalance and take money off the table? 

Mr. X.: Look, it's possible global pensions and sovereign wealth funds book some profits after the extraordinary year we had in 2019 but the truth is unlike last year at this time when stocks got clobbered and the Fed pivoted, rebalancing doesn't make much sense here.

Importantly, the Fed hasn't changed its dovish stance and as the bond king Jeffrey Gundlach recently noted here, the Fed has added quite a bit of liquidity into the system helping risk assets and it stated in October that it won't consider raising rates unless it sees a substantial and persistent increase in inflation.

L.K.: Gundlach also stated the yield curve is flat, the Fed won't raise rates and we might see an echo of the 2013 taper tantrum when long bond yields backed up 150 basis points in six weeks. Do you agree with him?

Mr. X.: Sure, we have seen a few of these so-called taper tantrums over the past few years. Do you remember Q1 of last year when long bond yields backed up and everyone was screaming about a bear market in bonds? You correctly pointed out it's a bond teddy bear market and stated you'd be a buyer of US long bonds at those levels, especially if the yield on the 10-year Treasury note crosses 3%.

L.K. Yes but I incorrectly predicted the US economy would slow in the second half of the year and that's why US long bonds would rally. Do you see a recession in the cards and a rally in long bonds?

Mr. X.: Well, if you look at the latest manufacturing data like the ISM, you will see signs of slowing but services are still strong and so is the overall economy with record low unemployment. One important leading indicator is the stock market and as long as stocks are doing well, it's hard to call a recession in the US economy and I doubt bond yields will go much lower than 2% unless there's a huge crisis which erupts.

The other huge factor weighing on US long bond yields is the international economy and what foreign central banks are doing. In particular, the ECB and BoJ buying negative-yielding bonds have forced investors in these regions to buy US Treasuries, weighing down yields on US long bonds.

Also, recall your conversation with Simon Lamy, a former VP Fixed Income at the Caisse who told you here that he doesn't buy the whole big bad bond bear market story. Instead, he sees US bond yields going back to their historic norms trading between 2% and 4%, going back to the historic range of US nominal GDP growth. So he sees 3% as a long-term neutral level for the 10-Year Treasury yield, not the upper range of long bond yields when looked at over many years.

Importantly, he doesn't see sustained US wage inflation and told you he would short US long bonds if the yield on the 10-year Treasury note fell below 2% and go long if it crossed 3.5% and approached 4%. Keep those levels in mind when trading long bonds.

After the massive rally in US long bonds back in August, you wrote a comment on why bond jitters are overdone and said unless deflation rears its ugly head in the US, it's hard to justify long bond yields at those low levels.

Right now, the yield on the US 10-year Treasury note is 1.87%, it might creep up to 2% in the near term but unless you see a sustained pickup in US and global growth, it's very hard to see a huge backup in yields back to 3% or higher. If you look at the ETF of US long bond prices (TLT) which moves inversely to bond yields, you will see it has broken below its 20-week moving average and is technically weak here but it remains to be seen if this is a brief pullback or the start of a much bigger selloff:

The contrarian in me thinks you should be buying US long bonds as they sell off and stocks soar to record levels but I realize seasonal trends being what they are, it's not clear to buy long bonds at this time and perhaps wiser to wait and see how the Fed and market reacts to incoming data.

L.K: Alright, let's move to the US dollar. I've been long the US dollar for a few years here based on a number of factors, including the flight to safety trade. What are your thoughts on the greenback?

Mr. X:  The US dollar has been rallying wreaking havoc on currencies with dollar-denominated debt. If you listen closely to strategists, they say the end of the dollar rally is here and this will be a boon for emerging markets.

Let's take a closer look at a US dollar ETF (UUP) I track as well as emerging market equities (EEM):

As you can see, the greenback has sold off recently and the ETF crossed below its 20-week moving but the rally remains intact and this could be a brief reprieve.

More interestingly, emerging market stocks have rallied as the greenback sells off but the impetus behind that move is clearly a dovish Fed.

Importantly, a dovish Fed sends a clear message to algos, CTAs and macro funds to go long risk assets and emerging markets are definitely risky assets.

L.K.: Canada's large pensions are moving their assets into emerging markets like China and India and have stated this is where growth will be over the next decade(s). What does that mean for retail investors?

Mr. X.: Well, I'd be very careful interpreting this shift in assets. First, it's happening but very incrementally. Second, unlike retail investors, Canada's large pensions invest in top private equity funds and have local partners on the ground where they can invest in private markets (infrastructure, real estate and private equity) in these regions.

Investing in private markets allows them to gain alpha over the long run which simply isn't available to retail investors who either invest in a public market ETF or in the stocks of private equity funds like Blackstone (BX) or Brookfield (BAM) which invest in these regions.

But as you know well, investing in public stocks carries beta risk which leads to volatility, and in emerging markets, this volatility is heightened by a lot of factors.

L.K.: So what are retail investors suppose to do if they want emerging market exposure? 

Mr. X: Honestly, they can invest in some ETFs to gain exposure to India (INDA), China (FXI) or broad emerging markets (EEM) but my advice remains to invest in the Dow Jones (DIA) which benefits from the growth in international markets and is made up of the most liquid stocks in the world:

In other words, don't beat your head trying to figure out emerging markets, look at the Dow, it's a pretty good gauge of global growth and right now, it's telling you the market isn't too concerned about trade tensions with China, a left-wing Democratic president or a blowup in emerging markets.

Of course, that can change as the year progresses, and a global growth scare will certainly impact the Dow Jones more than other US stock indexes because of its international exposure.

L.K.: Oh good, now we are entering a discussion on stocks. Everybody hates this rally and investors are apprehensive to invest given the extent of the rally this year. What do you expect will happen in 2020?

Mr. X.: Predicting the stock market is a fool's game but if you go back a year it was clearly a great time to buy stocks. In these markets, you have to know when to buy the dips and sell the rips but it's not as easy as everyone claims.

First, I ignore retail flows in and out of stocks and bonds as well as institutional flows. Why? Because the expansion of the Fed's balance sheet swamps these flows and you see signs of a bubble in sectors of the stock market.

LK: Is that dangerous?

Mr. X: It depends, if CTAs and algos start jumping on the bandwagon buying the rips, which is what they have been doing lately, that could force fundamental investors into buying stocks at higher and higher levels, and then you have the makings a full-fledged bubble which never ends well.

We are not at that point yet, this doesn't feel like 1999-2000 or anywhere near there but it doesn't take much to start seeing the madness of crowds as greed sets in and everyone fears missing out (FOMO).

L.K.: What about Ed Yardeni's argument that with rates this low, stock market valuations are still very compelling?

Mr. X: I take all these valuation arguments with a shaker of salt. Yardeni isn't stupid, he knows the Fed is juicing these markets up but he has a story to sell and will keep selling it even if he's an independent strategist now.

Let me be blunt. Any strategist who doesn't see a causation between the expansion of the Fed's balance sheet and the soaring stock market isn't worth paying attention to. They're either hopelessly clueless or just plain silly and peddling nonsense.

L.K: Alright, let's then take a deep dive into stocks and tell me what you think.

Mr. X.: Well, if you look at the overall market, the S&P 500 ETF (SPY) looks fantastic here, close to making a new record high and well above its 20-week moving average:

I guess you can say it's overbought here and due for a sharp correction but we are going into a seasonally strong period for stocks and with the Fed's balance sheet still in expansion mode, it's very hard to see what will derail this market in the near term. Maybe some negative trade headline but those selloffs have been very short-lived.

Also worth noting, on years where stocks have gained 20% or more, the subsequent year has also been positive, gaining double digits.

But everyone knows stocks are volatile beasts and a liquidity driven market goes up fast and typically goes down faster, which explains why so many investors hate this rally. It's that old adage: "Damned if you invest, damned if you don't invest."

L.K.: Got you, so what is your best advice given what has transpired in 2019 and how should investors position their portfolios?

Mr. X: Let's take a look at the price returns of the overall stock market and various sectors year-to-date:

Again, these are price returns, if you add dividend yield (2 %), the S&P 500 is up a whopping 31% this year, which is phenomenal and leaves a lot of active managers out in the cold as they try to add alpha on this index (an impossible feat in these Fed-induced markets).

No wonder everyone is praising the passive index approach, "just buy the index and forget about it" is the mantra of the day. Moreover, some are foolishly and openly recommending to put all your money in stocks and forget bonds altogether.

That's just stupid, if anything, as stocks keep making record highs, you need to take money off the table and rebalance your portfolio to mitigate against downside risk but if you listen to these permabulls, they keep telling you that a 60/40 balanced portfolio is "dead" and all you need is to invest in stocks.

Now, in terms of where to invest, clearly tech stocks (XLK) were the winners this year, gaining close to 50% on the backs of powerful rallies from Apple (AAPL) and Microsoft (MSFT), but I would definitely be careful here because if a bubble does develop, it will be in tech shares and that means those gains can evaporate just as quickly as they came.

L.K.: But tech stocks benefit in Risk Off and Risk On markets, which is why so many investors love them. Which sectors do you like if tech is overdone? Cyclicals? More defensive?

Mr. X.: That's a tough call. The steeper yield curve has definitely ignited cyclicals like Financials (XLF), Energy (XLE) and Industrials (XLI) but I remain very cautious on cyclicals given we are in the late innings of this great economic expansion.

I guess a good contrarian call here is to go long energy and commodity currencies, but that too is simply a call on the global expansion and I haven't seen a sustained turnaround in global PMIs.

L.K.: So you prefer defensive sectors for next year?

Mr. X.: Not really, if US long bonds keep selling off this quarter (ie. the backup in long bond yields continues), Staples (XLP), Utilities (XLU), and Real Estate (XLRE) will sell off too and they're richly valued here.

L.K.: So what are you saying? You don't like cyclicals, you don't like defensives, what do you like here and why?

Mr. X.: That's not exactly what I'm saying, the uptrend in tech shares and cyclicals can carry into the first quarter but you really need to be cognizant of risks here and if I may be bold, it's probably as good a time as any to have your money managed by a professional money manager.

High net worth investors have other options too, like investing in hedge funds which are (in theory) actively mitigating downside risks but the problem there is finding these hedge funds.

Like institutions, high net worth investors can also invest in private markets through private equity funds but there too, you're taking on illiquidity risk and need to find good managers and realize these markets are richly valued too and will get hit if stock markets get hit (PE funds need strong stock markets to exit their investments).

If you have no option but to invest in public markets, I would recommend a 60/40 portfolio and depending on how old or conservative you are, either invest in the S&P Low Vol Index (SPLV) or the S&P High Beta Index (SPHB):

A more seasoned investor can try investing in individual stocks but as you explained when you went over top funds' Q3 activity, even the best investors get clobbered picking stocks in this environment.

L.K.: If you were to look at stocks, however, what do you like and why?

Mr. X.: I still like healthcare stocks (XLV) and see tremendous risks and opportunities in individual biotech shares (XBI).

In fact, when you look at the top-performing stocks this year, you will recognize some of the biotechs you've been tracking for years:

But let's get real, it's very hard picking stocks in any environment, especially one where central banks control the game. Just look at this year's top performers and worst performers of stocks trading over $10 a share:

Again, you might recognize a lot of names in both groups but good luck predicting this ahead of time, you're better off buying a lottery ticket.

L.K.: I notice you focus a lot of US stocks. What about international markets?

Mr. X.: I love US markets, they are the most liquid, diverse and exciting markets in the world and I can play a lot of sectors there and I'm long US dollars over the long run. Sure, there are great companies all over the world, but the US hosts the bulk of them.

L.K. Ok, let's wrap it up here. Thank you for your time, I wish you and all my readers a Happy & Healthy New Year and thank those of you who value my work and have contributed to this blog to help me bring you great insights on pensions and markets.

Below, CNBC's "Power Lunch" team discusses markets with Mark Luschini of Janney Montgomery Scott and Eric Marshall of Hodges Funds.

Also, Jerry Castellini, CastleArk Management, and Peter Andersen, Andersen Capital Management, discuss new closing highs in the markets and what investors should expect next year.

Third, Jurrien Timmer of Fidelity and David Zervos of Jefferies join "Squawk on the Street" to discuss what's ahead for the markets going into 2020.

Fourth, Kenny Polcari, senior market strategist of SlateStone Wealth, joins "Squawk on the Street" to discuss what he's watching in the markets ahead of the bell on one of the few last days of trading left in 2019. Polcari thinks things are overdone but remember what Keynes stated: "markets can stay irrational longer than you can stay solvent."

Fifth, Tobias Levkovich, Citigroup Chief U.S. equity strategist, Thomas Digenan, UBS Asset Management head of U.S. intrinsic value equity and Bloomberg's Romaine Bostick talk about issues facing traders in 2020. They appear on "Bloomberg Daybreak: Americas."

Sixth, CNBC's Bob Pisani discusses sectors and mean reversion with CNBC's Brian Sullivan and the Fast Money traders, Tim Seymour, Gina Sanchez, Victoria Fernandez and Dan Nathan.

Seventh, Yardeni Research's Edward Yardeni sees troublesome signs connected to the record rally, stating the market is vulnerable to a 10% to 20% correction if it keeps melting up. Again, unless the Fed eases its balance sheet expansion, it's hard to see a major correction in the near term but there will be pullbacks.

Eighth, Jim Bianco, Bianco Research, on Fed policy in 2019 and where it goes from here. Bianco explains why he thinks this feels a lot like Y2K as the "Fed scrambles to stuff the banks full of cash" and how any pullback in monetary stimulus could spark a massive selloff.

Lastly, take the time once again to listen to insights from bond king Jeffrey Gundlach and macro god Stanley Druckenmiller. These are great interviews, well worth watching them a few times.