Don’t fight the tape – an often-overlooked stock market parlance, but 2019 was a year where that adage paid dividends to the market bulls!
Will 2020 bring more of the same?
The United States Financial markets completed a year that exceeded most expectations in 2019 by climbing nearly 28% as measured by the S&P 500, the tech heavy NASDAQ market jumped nearly 35% and the Dow Jones Industrial Average rose over 22% per the Wall Street Journal, December 31st, 2019 Stocks Set to Clinch Best Year Since 2013 as Tech Dominates. The U.S. Stock Market turned in its best annual gains in six years when the S&P 500 and the NASDAQ rose 30% and 38% respectively. Stock gains in the United States were broad based and equity markets around the globe also excelled. The best performing sectors were technology (47.5%) . Gains in Communications, Financials, Industrials, and Consumer Discretionary rounded out the top 5. Real Estate, Utilities, Materials all advanced more than 20% for the year. The laggards were Energy (6.9%) and Healthcare (18.3%).
The 2019 rally wasn’t limited to large U.S. stocks. The Stoxx Europe 600 gained 23% and turned its best performance in a decade helped by a deal on BREXIT. China’s Shanghai Composite jumped 22% and Japan’s Nikkei 225 rose 18% both helped by the China and United States phase one trade deal. Small stocks joined the party as well with small cap stocks advancing 25% as measured by the Russell 2000 index.
S&P 500 INDEX
Bonds or fixed income investments also rocked it in 2019. We saw interest rates in the United States drop sharply in early 2019, as investors flocked to the United States bond market in search of higher yields. The push into the US bond market resulted in an inverted yield curve mid-way thru 2019 and caused stock market participants and economists to question the ability of the stock market to advance. Inverted yield curves have, in the past, been a big early indicator of a pending recession. Yet the Federal Reserve joined the party over the Summer and in the Fall cutting rates three times and that was just what the market needed to snap out of its summer slumber. Stocks took off, the yield curve steepened, and equities and fixed income investors were further buoyed by the phase one trade deal announced with China, the United States largest trading partner.
Gold also advanced with gold futures jumping 18% in 2019. Finally, Muni bonds finished in the green in 2019 too, with the S&P 500 Municipal Bond Index skipping ahead 7.3% in 2019.
US 10 Year Treasury Yield
What’s not to like about a market that just won’t quit? This has been a historical run in the stock market helped by one of the longest business expansion periods in history. Yet if we look back at history, the stock market did quite well after World World II, advancing an extended period during the roaring 50s and early 60s. There were advances in energy, transportation and industrialization that drove the long expansion. One could argue, we have similar circumstances today and that the recovery could continue. We have technology advancements; cloud computing, energy advancements; with electrical cars and global expansion by emerging markets with major World population centers becoming more industrialized i.e.. China, India and Brazil.
Yet we know that market movements aren’t predictable or permanent and that markets don’t go up forever. Inevitably there will be a bear market and likely soon. That is why it is important to have a well-constructed portfolio, that is allocated to withstand a market event. We experience good and bad markets, but what stands out the most for investors is avoiding participating in the bad markets or the fear when it comes, as it will pass and make way for further gains in equity markets. We try and educate our clients on market opportunities and when they are created, re-balance client portfolios to take advantage of stocks when they are on sale.
Markets trade on interest rates, inflation and earnings and currently all those factors look in the stock market’s favor. Interest rates are low, inflation is contained, and earnings seem to be steady. If any of those three variables shift in a meaningful way the equity markets will experience a significant correction and possibly a bear market cycle. A bear market cycle lasts on average 14 months and stocks hit their bottom generally about half-way through the downturn or about 7 months. The average decline is 25-30%. It is during those times investors need to stay the course, as equity markets can and do recover. the Great Recession was on example where things looked very bleak with banks failing, prearranged banking mergers by the government and earnings collapsing, yet stocks recovered and have been on a record run ever since.
If you were asked what the annual returns were over the last 10 years in the Dow Jones Industrial Average, “the Dow,” would you know how good we’ve had it? Would you know that 3 of 10 years the market was up more than 30%? 4 of 10 years better than 20%? Two years increased by more than 10% and only one was negative and even then, slightly so?1
In hindsight, we can look back and say, “what an easy decade of investing!” If we look back at a few headline risks, though it may have felt like we were going to derail the recovery from the Global Financial Crisis:
- Fukushima Daiichi Nuclear Meltdown
- Occupy Wall Street
- 2016 Presidential Election
- Ebola and Zika Outbreak fears
- Global Terrorism – ISIS, Boston Marathon, Paris (twice)
- Boeing’s 737-Max planes grounded
Oh, and the President was impeached by the House of Representatives on December 18th, 2019.
So yeah, a lot happened in the last 10 years (and this year!) that, at the time, seemed like it could have “crashed” the markets. But it didn’t.
The Dow was up 252% this decade! And to put that further into perspective, it was “only” the 4th best decade out of the last 120 years. If you want more recent history, in the 40 years since 1980, there have been 33 positive years, and 7 negative years. So whether you’re a bull, or a bear, one thing we can all agree on is that US stocks, proxied by the Dow, have been an incredible wealth-building asset class.
Naturally, you’re probably thinking, “Okay, its been great in the past, but what about the future?” And that’s the right question to be asking. The problem, is that the only legitimate way to answer the question is to say “nobody knows.”
What’s evident is that central banks like the Fed and European Central Bank among others have no fear using their endowed power to print money and prop-up economies around the world. You may have noticed these low interest rates have hung around for a while. In a supply and demand sense, that would tell you that everybody wants to own government bonds. (the more buyers, the lower the interest rates to attract buyers). Governments aren’t afraid to use monetary and fiscal policy to ease economic tension. The show goes on.
This doesn’t mean that the market will stop reacting positively to the injections of financial steroids they continue to be fed, but it doesn’t mean that the music stops. An important note to remember is that just because we see 2020 as the start of a new decade, and January as the start of the new year, it’s utterly meaningless to the markets. The markets are designed with the intent of perpetual existence, so what difference does one year, or one decade really have?
As fiduciary advisors, our aim is to help our clients find the right balance of what they need in their portfolios. Long-term prudent investing is not a game of “did we beat the market” but rather it’s a continual process of understanding ourselves as people and creating efficient strategies with our investment dollars that will allow us to live our lives as we desire. Our commitment at HighTower Bellevue is to be guiding our clients along this journey, through good times and bad, ups and downs, whatever life throws our way. That’s why we help our clients with financial planning, and don’t simply create a financial plan.
In summary, many of our economic indicators remain positive, and growth overseas after the phase one China trade deal seems to be improving. In addition, China in early January moved to add liquidity to their banking reserves further helping to stimulate their economy. Finally, the Federal Reserve seems determined to provide unlimited liquidity to the fixed income market. Eventually this party will temporarily end and the ending likely won’t be pretty, but as they say in the movies try and enjoy it while it lasts.
Happy New Year from HT Bellevue and we look forward to a wonderful 2020 and seeing you all at our annual Client Appreciation event on February 26th. Details will be forthcoming.
HighTower Bellevue is registered with Hightower Securities, LLC, member FINRA and SIPC, and with Hightower Advisors, LLC, a registered investment advisor with the SEC. Securities are offered through Hightower Securities, LLC; advisory services are offered through Hightower Advisors, LLC.
This is not an offer to buy or sell securities. No investment process is free of risk, and there is no guarantee that the investment process or the investment opportunities referenced herein will be profitable. Past performance is not indicative of current or future performance and is not a guarantee. The investment opportunities referenced herein may not be suitable for all investors.
All data and information reference herein are from sources believed to be reliable. Any opinions, news, research, analyses, prices, or other information contained in this research is provided as general market commentary, it does not constitute investment advice. The team and Hightower shall not in any way be liable for claims, and make no expressed or implied representations or warranties as to the accuracy or completeness of the data and other information, or for statements or errors contained in or omissions from the obtained data and information referenced herein. The data and information are provided as of the date referenced. Such data and information are subject to change without notice.
This document was created for informational purposes only; the opinions expressed are solely those of the team and do not represent those of Hightower Advisors, LLC, or any of its affiliates.