Update on the Markets

January 1, 2020

Key takeaways

• 2019: What a Great Year!
• Big Sigh: No Recession
• A Nod to the Fed 
• Temper Expectations
• Income Is Key

Great Year 

2019 was a phenomenal year for all kinds of investments: stocks, bonds, real estate, even gold. 2019 is a year to remember. The S & P 500 rose 28.9% – 31.5% with dividends. US Small stocks rose 25.5%. Gold increased by 18.9%. Unusually, bonds rose too. The Barclays US Aggregate – an index over 70% US Treasuries and Agencies – rose 8.7%. US corporate bonds returned 14.5%. You can thank the Fed for a lot of this price action. The Fed’s tide of liquidity later in the year raised the prices of almost all investments. 

A Big Sigh of Relief 

Much of the action in stocks this year can be explained by the gradual realization that a recession is not close. At this time last year, investors were convinced that a recession was imminent. Remember that 653 point drop (2.9%) in the Dow on Christmas Eve? It was the worst Christmas Eve in Dow history – capping off a month where stocks were already down over 13%. Stocks barely avoided a bear market in 2018- losing just shy of 20% – before turning around. We were in the longest-ever government shutdown, and perhaps investors were too pessimistic. As the year wore on, it became evident that a recession wasn’t near. The labor market strengthened. Corporate earnings surprised. Consumers kept spending. The yield curve sloped upward again. Much remains the same as we end this year. 

Thank the Fed 

In addition to the above, we must mention that a lot of the upside action in stocks is due to the Fed’s three cuts. Recall that the Fed, judging that the economy no longer needed as much help, began raising rates at the end of 2015. The last hike at the end of 2018 really hurt. Early in 2019, the Fed began to recognize the various headwinds facing the global economy and started to backtrack on its hawkish stance. The stock market took off in July after the Fed cut rates for the first. 

Stocks Can’t Repeat 

Never say never, but, realistically, stocks can’t repeat the amazing performance of this past year – more so this past decade. Stocks returned over 13 % annually this past decade. The historical average return for the stock market is just under 10%. A period of below-normal returns seems likely. Stocks should continue to go up – just at a more moderate pace, perhaps 3 – 5% this year. The economy is solid. The labor market is strong. Consumers are spending. Manufacturing is coming back. Inflation is tame. The Fed is on hold. But a lot of this good news may already be priced in. Most of the gains in this record-long bull market may be behind us. 

Income is Key 

At this juncture, income will be key. The global economy is slowing, and there are several geopolitical risks (always!). Details on a first phase US-China trade deal are murky. GDP should trend at around 2.0%, but corporate earnings are a wildcard. And don’t forget the election! At this time, when anything can happen, it is important to be very well diversified. Make sure you are comfortable with your asset allocation. Consider paring back on some of your winners and have cash at hand for opportunities this coming year. Volatility can be your friend. 

Please let me know if you have any questions or concerns.  

Sincerely,

Henry