Looking Back & Ahead to 2020

January 8, 2020

From Tim Rose

As we look back, 2019 proved to be another year of volatility. Although the S&P 500 ended the year with an attractive gain of 31.5%, the road was anything but smooth and straight. The market climbed the classic “wall of worry” as those poor souls that invest with their emotions vs. the fundamentals and discipline were left behind.

(JP Morgan)

In 2018 the market experienced multiple contractions due to a temporary inverse yield curve and investor panic over fear of a recession. 2019 reversed that trend due to calmer heads, hopes of a China deal and Federal Reserve easing.

(WSJ/The DailyShot)

The Fed ended 2019 by buying short-dated Treasury bills out of the open market which serves to increase liquidity (flood the market with dollars), these funds always find their way into assets which makes markets go up (in this case, multiple expansion).

(@Schuldensuehner)

Due to actual trade wars and fear of trade wars, Emerging Markets and Europe continued to show weakness. China experienced accelerated capital flight as businesses in that country moved their manufacturing out of the county to find manufacturing sources that were tariff free or at least had lower tariffs than China. The stock and real estate markets that in the past made China rich are now perilously full of debt and downside risk.

Your portfolio out-performed, due in large part to investments in technology companies, banks, and “fintech” companies i.e. Master Card and Visa.

How should 2020 shape up? Here are points to consider:

1. The S&P 500 index currently trades at a rather full valuation of about 18.4 times forward earnings. Not outlandish considering where interest rates are, but going forward, they need to be supported by increased earnings. Is all the good news priced in?

2. Expect at least one or more 5-10 percent stock market correction-which we will take advantage of to buy stocks at a discount.

3. The economy is very strong with full employment and the Fed is on hold regarding increasing rates. Will inflation return and Fed turn hawkish?

4. There is a strong socialist wave sweeping through the Democratic party with promises to reverse all the current Administration’s policies that spurred strong economic growth. Keep an eye on the elections in the second half of 2020.

If it is status quo after the election, we could see our 2020 economy grow in the 2.5-3% range as employment remains strong and capital expenditures (companies investing in new equipment and plants) begin to kick in due to trade pressures subsiding and increased visibility in future events. S&P 500 earnings could expand in the range of 7-10%. You could possibly expect double digit gains for your portfolio.

For 2020, we recommend the following for our clients:

1. Maintain exposure to Large-Cap dividend paying growth stocks, financials, and technology holdings which should do well in an a flat or increasing interest rate environment.

2. Maintain exposure to Mid and Small-Cap stocks as they under-performed in 2019 and represent value.

3. Expect continued market volatility as the markets react to the upcoming elections and ongoing circus in Washington D.C.

4. Maintain bond exposure to 20% or less, with weighted maturity of no more than 3 years. Increase income with high-grade bonds and Large-Cap stocks with growing dividends.

5. As always, remember when investing, “time is your friend, impulse is your enemy”, as said by the late, great investor, John Bogle. So, stay invested.

We wish you and your family a fulfilling, healthy and prosperous 2020. And, as always, it is our distinct pleasure to serve you.