Quarterly Commentary – December 2019

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After more than a year and half without meaningful new highs, U.S. equities were finally able to break out in the fourth quarter. In 2019, the S&P 500 traded higher on 59% of all trading days, which ranks at a 7th record going back to 1928. Since the stock market rally revived in early October, the major indexes have been in a strong, steady ascent this past quarter. The following are performance numbers from various popular indexes. Please remember index numbers are not individually comparable to a properly diversified portfolio. Each portfolio may include an allocation to securities similar to these indexes in varying amounts based on your personal risk tolerance and should only be compared in that context. The S&P 500 was up 31.5% for 2019. The Dow Jones Industrial Average was up 25.3%. The Nasdaq Composite Index was up 36.7%. The Russell 2000 Index was up 25.5%. International equities as represented by the MSCI AC World Ex U.S. Index were up 21.5%. The MSCI Emerging Markets Index was up 18.4%. Fixed Income as represented by the Barclays Aggregate Bond Index ended up 8.7% for the year.

Last December, headlines were grim and investors were dumping equities amidst very negative sentiment. Under the surface however, there were some positives. Housing and the consumer were strong while stocks were undervalued. A year later, things are looking better. We continue to face a certain amount of chaos in Washington, however, hours after the House impeached the President on a party line, Congress passed the US, Mexico, Canada Trade agreement on a bipartisan basis. The US and China completed phase one of the trade deal with more substance than had been expected. The Fed, having tightened rates in 2018, reversed that course in 2019. Many of the macro factors that were headwinds last year have shifted to tailwinds. Things that were working in the market’s favor at the end of 2018 have also reversed. We are looking at a pricier market where equities are no longer undervalued, and sentiment, while not exuberant has become more bullish. We must remember that valuation is not very useful for predicting where the market might be headed near term. Interestingly, as of September, investors had taken a record 1.1 Trillion out of equities and put that money in bonds and money market, causing many to miss out on further gains. Corporate buybacks and mergers and acquisitions have supported the market against these outflows. Historically, a lot of money moving to less risky assets has been a contrarian signal indicating that stronger market returns are ahead. The retail investor came back as evidenced by late December inflows likely due to fear of missing out. There is a significant amount of cash still on the sidelines that could help drive future gains in the new year.

The likelihood of an economic recession remains low near term. While conditions looked grim heading into 2019, the economy stabilized as the Fed cut rates three times in 2019. The Manufacturing sector had been the biggest problem over the past year, but other areas of the economy were able to offset it. An easing of trade issues with China would help that sector turn around. Housing, which was one of the top sectors contributing to the economy received a big boost from lower interest rates which improved affordability. Slower global growth remains a concern. Inflation expectations remain close to historical lows and various central banks are struggling to engineer a revival. Policymakers may be reaching the limits of conventional monetary policy. The ability of companies to pass costs on to consumers appears limited, increasing pressure on profit margins. Trade headlines drove a lot of the volatility in 2019. The easing of trade tensions with China should go a long way toward helping with growth and stability in 2020. A cloud lifted over Brexit as Prime Minister Boris Johnson’s resounding victory laid a path toward determining the U.K.’s future trading relationship with the EU and the rest of the world.

While a tranquil and steady bull may be hard to sustain for another year, we are cautiously optimistic. The momentum of 2019 should carry into 2020 barring any negative news on the China Trade or other geopolitical front. Wall Street will start turning its focus to the outcome of the 2020 Presidential Election and re-assess the probability of a Fed hike. As we move higher, risks increase and that may translate itself into added volatility and a possible correction as investors take profits, a normal part of the process.

We hope you had an enjoyable holiday season. We wish you a Happy New Year and are very thankful for the opportunity to serve you.