Trisha shares her thoughts on the markets, either about specific events that are happening or the market in general. Please check back regularly for new content.
Fourth Quarter 2019
December capped what turned out to be a quite robust year of performance for investors. US stocks led the way with annual gains ranging from 25.34% for the Dow Jones Industrial Average to 31.49% by the S&P 500. At the same time international stocks also faired well with the MSCI EAFE Index gaining 22.01% for the year. And, perhaps most surprising given expectations at the start of the year, the bond market also surged. Buoyed by multiple Federal Reserve interest rate cuts the Bloomberg Barclays U.S. Aggregate Bond Index posted an impressive increase of 8.72% for the year.
Several clients have asked why the investment markets performed as well as they did during a year when the US economy slowed and at one point showed indications of heading towards recession, corporate earnings were flat (and in fact declined in the 3rd quarter and possibly the 4th), trade issues negatively impacted economies around the world and uncertainty seemed to never go away.
It is never possible to explain how investment markets behave in just a couple of sentences – many books have been written on the topic and still it feels incomplete. That being said, there are some key things that I can point out that can help explain last year and also hopefully help you as you think about the markets and your investments going forward.
The investment markets as a whole are generally forward looking and are more concerned about what it going to happen in the future than what happened in the past. If we apply that lesson to last year it makes sense and the trend is fairly easy to spot. The stock market corrected (declined by 10%) in May just as the economic worries started to rise but quickly rebounded even as the interest rate curve inverted and talk of a possible recession spread.
Why? Quite simply because of an expectation that the Federal Reserve would step in and cut interest rates to bolster the economy – which it did for the first time since 2008 at the end of July. The Federal Reserve went on to cut interest rates two more times in 2019, helping to shore up the economy overall and – since interest rates have a correlation to stock prices – for investors to feel more comfortable owning stock.
At the same time the US consumer apparently never got the memo that there were economic concerns to begin with. Our consumer spending and confidence remained strong throughout the year and, since our own spending accounts for 70% of economic activity in the US, our economy has remained much more resilient than some had feared.
Going into the end of the year the markets seemed to be pricing in an expectation that trade issues would quiet down in 2020 (which the signing of the Phase 1 deal with China would seem to affirm) and that the Federal Reserve would be unlikely to raise interest rates in a Presidential election year.
That leaves us today with an economy in decent shape, expected to grow again in the same 2% range, with corporate profitability expected to struggle for another couple of quarters but then improve and with stock valuations starting to push toward higher valuation levels that can make them ripe for volatility. Layer that with the uncertainty of a US election cycle and the possibility of rising geopolitical tensions and certainly the potential for volatility exists.
Taking everything into account we continue to be constructive for the long term but we wouldn’t make any outsize moves over the short term. History has shown that trying to time the markets is more often than not a fool’s mission. Instead we believe that diversification and an investment strategy that is appropriate for your situation is key.
Forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties which are difficult to predict. Past performance is not indicative of future results. All indices are unmanaged and investors cannot invest directly in an index. Diversification does not ensure against market risk. Trisha Arndt, CFP®, is president of Wealth Strategies of Wisconsin Ltd, 901 Kimball Lane, Suite 1400, Verona, WI 53593, 608-848-2400. Securities and advisory services offered through Commonwealth Financial Network®, Member FINRA/SIPC, a Registered Investment Adviser.