“Faster than a speeding bullet… more powerful than a locomotive… able to leap tall buildings at a single bound…Look! Up in the sky! It’s a bird… it’s a plane… it’s the 2019 stock market!”
What a year for equity investors! 2019 will go down as a banner one, with overall performance not seen since 1997. It’s been a happy time for us all, and we’d like nothing better than for the parade to continue. Why was 2019 so positive, and what’s in store for 2020?
There were many factors for the tremendous equities gains – low-interest rates, solid corporate earnings, minimal unemployment, lack of any major exogenous trauma, manageable inflation, and momentum. Almost every asset class was profitable. Fixed income had slight gains, and commodities did well. Gold had its best year in a while, and even the price of crude rebounded in the fourth quarter. All in all, 2019 exceeded the expectations of virtually every pundit, including me. I was confident that we’d have a rebound, but I certainly didn’t foresee the out-sized gains we experienced.
2020 promises to be an interesting change. From a statistical point of view, according to S & P, after equities post a gain of 20% or more during a year, the next year averages another 11.2% leg up. I’m not sure that we’ll get to that level, but I remain optimistically constructive about the underlying macroeconomics. What could possibly derail the train? The upcoming Presidential election could have a significant impact on investor sentiment. At this juncture, many voters might let their portfolios make their choice for them, in which case a Trump re-election seems likely. A victory by a progressive Democrat (Sanders, Warren) would almost certainly be viewed negatively by Wall Street. My first proverbial line in the sand will be drawn after “Super Tuesday” in early March. At that time, we’ll perhaps know who Trump’s opponent will be. Handicapping November 2020 might become easier after that. Don’t forget that Wall Street hates uncertainty more than anything else, and clarity about America’s next four years of leadership will be helpful. Traders have done an excellent job divorcing themselves from the DC miasma thus far, and there’s no reason to assume that they won’t continue along this path.
Last December, we were in the process of bottoming out on the major averages after a disastrously negative (down 19% at nadir) quarter. I opined that it was not time to panic and that the elevated volatility levels we were experiencing would soon subside. We stayed rather bullish on stocks and were rewarded for our steadfastness. Santa re-appeared this year because there was no tax-motivated loss harvesting. In addition, under-performing hedge funds had to “window dress” their portfolios by adding equities holdings. It’s been a strong December in 2019, adding to the already nice news of the past year. We might see a bit of profit-taking in January, but the groundwork for more gains hasn’t changed. There’s also the psychology of “FOMO” at work. Fear of missing out might spur retail investors to invest idle cash which is still sitting at elevated levels. We’ll continue to assess 2020 as the year unfolds, but it’s nice to take a victory lap every once in a while.
The last market letter of the year allows us to review our prior year predictions and give some hypotheses for the coming twelve months.
Let’s first go over last year’s thoughts:
1.) The Mueller probe will be completed in the first quarter of 2019 with devastating consequences for the President and many of his allies. THE REPORT ARRIVED MID-YEAR AND DID NOT HAVE THE EFFECT THAT WAS EXPECTED. PRESIDENT TRUMP CONTINUED HIS TERM LARGELY UNSCATHED.
2.) The Federal Reserve will only raise rates once in 2019. Jay Powell will continue to be the Chairman. BOWING TO PRESIDENTIAL PRESSURE, THE FED ACTUALLY LOWERED RATES IN 2019. CHAIRMAN POWELL CONTINUES HIS TENURE.
3.) In a stunning reversal, Brexit will not occur. Theresa May will be replaced as Prime Minister. Another major Western European leader will also depart in 2019. I MIGHT HAVE DONE A BETTER JOB PREDICTING THE EUROZONE THAN AMERICA LAST YEAR. BREXIT HAS NOT OCCURRED YET, AND BORIS JOHNSON IS THE NEW BRITISH PM. ALL OTHER MAJOR LEADERS ON THE CONTINENT ARE STILL THERE, BUT PERHAPS NOT FOR LONG.
4.) ISIS and Al-Qaeda will be emboldened and resume terrorist activity. THANKFULLY, NOT AS WIDESPREAD AS PREDICTED, BUT THEY’RE BACK ON THE MAP.
5.) Relations with North Korea will remain status quo. CORRECT THUS FAR.
6.) Syrian Kurds will suffer significant losses after American troops leave their country. SAD, BUT TRUE.
7.) Stock market volatility will remain elevated for most of 2019. CERTAINLY MISSED ON THIS ONE. WE WENT FROM AROUND 30 ON THE VIX INDEX AT 2018 YEAR-END TO AROUND 13 TWELVE MONTHS LATER. MOST OF 2019 WAS QUITE PLACID INDEED.
8.) There will be a resolution to the US-China tariff issue, but not as favorable as originally designed. PRETTY MUCH CALLED THIS ONE ON THE MONEY.
9.) The Cleveland Browns will make the NFL playoffs, and the Columbus Blue Jackets will reach at least the NHL conference finals. WHAT WAS I THINKING?
10.) The stock market will rebound, but not after several periods of choppiness. We’ll be back in the black. Fixed income and commodities will remain relatively flat. AS MENTIONED ABOVE, DID NOT FORESEE THE MAGNITUDE OF THE GAINS, BUT I’D RATHER UNDER-PROMISE AND OVER-DELIVER.
11.) BONUS PREDICTION – Donald Trump will resign the Presidency in 2019 following the indictment of his eldest son. MAYBE I NEED TO GO BACK TO THE BROWNS AND BLUE JACKETS?
Perhaps not a stellar year for the crystal ball, but the portfolio results (pardon the pun) trumped my State Fair predictive abilities.
Let’s reload for 2020:
1.) The Presidential election will be contested by two seventy somethings.
2.) Angela Merkel will step down from the Chancellorship of Germany.
3.) 2020 will be another record year for climate change related events (fires, earthquakes, hurricanes, cyclones, ice cap melt).
4.) Both the Senate and House of Representatives will be under Democratic control. At least one prominent Republican senator will lose his/her seat because of fallout related to the impeachment trial.
5.) The Federal Reserve will neither raise nor lower interest rates in 2020.
6.) US stocks will have a positive year, with gains in the high single digits. International markets will slightly out-perform on a relative basis.
7.) Gold will temporarily spike in price during the election cycle due to fear that President Trump will not be re-elected.
8.) The Boeing 737 Max fleet will finally be approved for world air travel.
9.) There sadly will be a major terrorist event on either American or European soil.
10.) Major network televiewing habits will decline in 2020 on account of political commercial fatigue.
I was lucky enough to visit Vietnam and Cambodia this month. Vietnam is a most exciting country… they’ve made incredible strides since the end of the war 45 years ago. It’s a fascinating blend of rampant capitalism under Communist rule. There is a massive dichotomy between the almost Western feeling cities of Saigon and Hanoi, and the rural central highlands or northern agrarian areas. There are still vestiges of the war, from the tunnel city of Cu Chi to the third generation of Agent Orange babies. But you can’t help experiencing the youth and optimism of this rapidly developing part of Southeast Asia. I can’t wait to go back. Cambodia, on the other hand, was quite difficult for me. The country is preternaturally beautiful, and I spent the better part of three days exploring 12th-century temples in Angkor Wat.
However, I couldn’t get my arms wrapped around the fact that the Pol Pot regime basically killed 6000 people daily from 1975 through 1979. There’s literally no one between the ages of 40-65 living in the country. An entire generation was lost. There’s not enough work for the young generation, so they migrate to Vietnam or Thailand. There’s little, if any, semblance of health care for the populace. Cambodia reminded me a bit of Cuba – wonderfully gentle people living in tropical natural beauty, but with little chance of bettering their lot in life. It’s simply a matter of opportunity, which is one of the many things we take for granted in America.
As we close out the year and decade, I again want to thank you for your trust and support. Our team of Kelley, RC, Christie, and me will continue to assist you with any questions that you have as we all get a bit older. Hug and kiss the ones you love…
Happy New Year!
|The opinions expressed in this letter are those of William Schiffman and should not be construed as specific investment advice. All information is believed to be from reliable sources; however, no representation is made to its completeness or accuracy. All economic and performance information is historical and not indicative of future results. Diversification cannot assure a profit or guarantee against a loss. The S&P 500 Index is a broad based unmanaged index of 500 stocks, which is widely recognized as representative of the equity market in general. Indices are unmanaged and do not incur fees. One cannot directly invest in an index.
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