Fish In A Barrel
Happy New Year. May 2020 be a good year for all.
2019 certainly was for investors, as my regular table indicates with the green column ranking final year returns in descending order:
It didn’t matter if you were a conservative bond investor, including in tax-free municipal bonds – you made almost 9%. Investors heavily weighted toward US stocks continued to be smiled upon as US stock, represented here by the S&P 1500, which includes small and medium-sized companies as well as large ones, was up over 30%, a performance that no one, and I do mean no one, predicted at the end of 2018’s fourth quarter, which saw stocks fall almost 20% in value. In a sense, therefore, 2019 made up Q4 2018 losses and then some. Please be aware that it is not unusual to see such a strong year for investments late in business cycles, and the accommodating actions of the Federal Reserve over the past year - three decreases in short term interest rates - provided additional tailwinds.
International stocks showed strong signs of life after recent years’ lagging returns, yielding 22% for the year, ordinarily a phenomenal performance but which falls well short of US stocks. Still, I’ll take it, and hope you will too.
Emerging market stocks inked over 18% in returns, with most of those gains coming in the fourth quarter alone, when they were the best performing asset class of the group by a hefty 300 bps.
Even gold and commodities, the latter of which has had horrendous five and ten year runs, produced 18% gains.
Inflation remained quite low at 2.41% for the year, a bit higher than the extraordinarily low 10 year average of 1.74%, but well below the 3% average dating back to the 1930’s.
In short, if you had a pulse, and you owned investments in 2019, you made money.
Despite this result, many investors remain ambivalent rather than euphoric about securities markets for a number of reasons, including:
Valuations. As I have repeatedly noted, the current bull market is the longest in US history, and while valuations are far from the highest they have ever been, they are not inexpensive, although certain pockets of the equity markets remain attractive (namely, value stocks and international stocks). Bond values in 2019, to everyone’s surprise, rose steeply, and the benchmark ten year Treasury bond now offers 1.8% in yield – meager and unappetizing compared to the almost 3% it yielded at the beginning of 2019.
Politics, both national and geopolitical. Politics during the age of Donald Trump are never far from people’s minds, although I have done pretty well to put aside all of that during a two week stay at my ranch over the holidays. Presidential control over tariffs; over foreign policy; and over the federal bureaucracy, have plunged those sectors into chaotic days, and it is impossible to predict short term outcomes, much less long term ones. Both the prospect of Donald Trump being re-elected, and the prospect of him not being re-elected in 2020 present extraordinary risks in a divided country (though I far and away prefer the second outcome). While investors generally focus on investment cash flows over the long term, any day in politics from this President can have an effect on securities prices, both positive or negative. We are currently witnessing that with weak stock markets to begin 2020 in the wake of the President’s decision to first withdraw from the Iran nuclear deal, and now assassinate Iran’s top general, its second most powerful public official, and threaten by tweet additional destruction of that rich and historic country’s priceless cultural treasures and Persian legacy. Finally, US fiscal policy continues to be financed by extraordinary amounts of debt, especially in the wake of 2017’s massive tax cuts, and neither party seems interested in balanced budgets.
Monetary Policy. The Federal Reserve continues to be accommodating when needed to support markets, including the “repo” market for overnight securities lending during the past year. This has led many observers to claim that markets are therefore “artificially inflated” by Fed actions rather than by fundamentals, and that, at some point, prices will correct when the Fed is no longer able to step in during times of market stress.
These are all real and substantive concerns, I do not minimize them, and it is impossible for me to state that these risks will not materialize in securities markets and prices.
As most of you know, I do not ever get into the predictions business, and 2019 is a prime example of why I do not. But I would not be at all surprised to see markets deliver far more tepid results in 2020 than they did in 2019, an investment year which was like shooting fish in a barrel (which, by the way, I have never done, and never will do).
If any or all of this discussion causes you to want to speak with me about your investments or any other aspect of your finances or your life, I always welcome your contact and we can arrange a time to talk. A year like 2019 often causes many people to chase yesterday’s returns, which is almost always a very bad idea that can end in grief. I encourage all clients to offer gratitude for these results, and then place their focus right back on their personal financial situation, goals, and needs, which are the foundation for the work we do together.
I am grateful for your trust and confidence in all of us at New Capital, and I look forward to passing through 2020, which is likely to be a momentous period, together with you.
Leonard Golub, CFA
Fiduciary Financial Advisor