To Our Valued Clients,
It was a year that began in a bear market with the wounds of a steep sell-off in December of 2018 still fresh in our minds and ended with the biggest equity market returns since 2013. In 2019, the S&P 500 Index returned nearly 29%, the Dow Jones Industrial Average posted a 22% gain and the tech-heavy Nasdaq performed even better, returning nearly 35%. Fixed income also performed well in 2019 as the result of a reversal in Federal Reserve policy. The Bloomberg Barclays US Aggregate Bond Index returned nearly 9% during the year. It was a year filled with concerns over a global economic slowdown, disruptive trade wars and fears over Federal Reserve policy missteps. However, strong and resilient economic and market fundamentals drove equity markets higher and bond yields lower as the year progressed.
Much of the stock market’s gains in 2019 can be attributed to a dramatic shift in monetary policy at the Federal Reserve, which was cheered by global investors. The Fed raised rates four times in 2018 only to cut rates three times in 2019, pushing investors on a quest for yield and better returns which resulted in equity inflows.
One of the biggest uncertainties throughout 2019 was President Trump’s trade negotiations with China, as well as re-drafting the North American Free Trade Agreement with Canada and Mexico. The imposition of tariffs and threats of a deepening trade war added to market volatility throughout the year, only to be reversed by tweets from the President saying progress is being made. Although the trade war dominated headlines in 2019, the overall effects on the stock market proved to be transitory. Towards the end of the year, the House passed the United States-Mexico-Canada Agreement, which is Trump’s replacement for NAFTA. The administration has also come to a phase one trade agreement with China.
In August, investors attempted to interpret the meaning of an inverted yield curve. This occurs when short-term interest rates are higher than longer-term rates, and it has historically been a signal of an impending recession. However, as the year progressed, bond markets stabilized and the yield curve began to normalize and steepen. One reason for the lack of reaction to the inverted yield curve was continued growth, resilience and stability in US economic data. Although sometimes mixed, it seemed whenever any piece of negative economic data was released, it was offset by strong consumer spending and a historically low unemployment rate.
As we look towards a 2020 election year, we are focusing on a number of issues that can affect how we position our portfolios. With a pivotal US presidential election contest in November, we want to remind investors that election results, historically, have made essentially no difference when it comes to long-term investment returns. What does matter is staying invested. Looking at election results back to 1932, US stocks have trended upwards regardless of whether a Republican or Democrat won the White House. Much of the year will be spent forecasting the November election both with regard to the race for the presidency and control of Congress. A divided government remains the most likely outcome. However, one party controlling the White House, the House of Representatives and the Senate could bring more radical policy change.
In 2020, we expect the US economic expansion to enter its 12th year, supported by a strong consumer and service economy. Investment spending, however, should remain sluggish as businesses deal with uncertainty from ongoing trade tensions and a slow-growing global economy. International economies have been under pressure for nearly two years, thanks largely to the impact of trade uncertainties. The combination of broad monetary easing and the expectation that the trade war will not escalate further, should permit global growth to stabilize and potentially shift higher in 2020.
As mentioned, global monetary policy made a sharp reversal in 2019 as global central banks became more accommodative. Now looking towards 2020, we believe the “lower for longer” adage remains intact for interest rates. Easy monetary policy around the globe should provide a supportive environment for economic growth, but downside risks are building. Much of this depends on whether the US and China can reach a sustained trade-war truce. With 2020 poised to be a volatile year for markets dominated by political and geo-political risks, it is more important than ever for investors to stay committed to sound investing principles and their long-term investment plan.
As we head into the first quarter of 2020, we wish you and your families a happy and prosperous winter season. We thank you for your ongoing trust and confidence, and hope we can continue to help you discover The Next Piece – to Your Peace of Mind.TM
Josh Williford, MSF
Director, Empowered Investor
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