2019 Market Reflections

December 26, 2019 · Written By J. Stephen Lee

The books are preparing to close on quite a year. While geopolitical turmoil has seemed to be the order of the day, financial markets have provided impressive performance.  U.S. stocks have led the way — at this writing, the Standard and Poor’s 500 has gained over 30% since January 1, and international benchmarks, while lagging for much of the year, have joined in the party, with developed international markets up 22% and emerging markets up 18%.  Not to be outdone, in a world of low and below-zero interest rates, bonds have also provided their share of surprises, with the Barclays U.S. Aggregate Index increasing in value by over 8%.

But just a glance at the daily news seems to defy the achievement of these numbers — how can financial assets perform so well when so much uncertainty and political turmoil abounds?

Since the 1982 classic movie E.T. is seeing new life on screens this holiday season, perhaps an extraterrestrial example may be helpful in explaining the apparent dichotomy…as in, “If an economist from Mars were dropped onto earth today, what would they observe?” Here are some points an impartial Martian would see through an economic lens:

  • Robust financial markets
  • Record low unemployment in the world’s largest economy
  • Generally rising wages and healthy consumer spending
  • Low worldwide interest rates, and global central banks loudly and publicly pledging ongoing monetary support
  • Record corporate profits with margins holding steady
  • A burgeoning middle class in emerging economies that are seeing dramatic improvements in their quality of life and are clamoring for goods and services with their newfound buying power

You may well ask, “But what about impeachment in the U.S.? What about the U.K. leaving the European Union? What about climate change?” The list of worries is real and could go on, but we hope the point is made…from an economic perspective, there are signs that global growth will continue and even improve. It’s a generally benign economic outlook, and one that contrasts sharply with the political and social context. But this serves as an important reminder that financial markets can, and often do, operate independently of how political winds blow and opinion pages opine. Today’s information cycle is driven by instantaneous reactions to events and focuses too often on how people feel, often well before any thoughtful analysis can occur. It is critical to note and remember that this minute-by-minute, perception-driven media cycle does not capture the long-run drivers of financial asset performance.

So, what are some key themes to consider today?

  • The recent “Phase One” trade agreement between the U.S. and China significantly reduces potential negative impacts of tariffs and trade tensions
  • Similarly, the recent U.K. election reduces the uncertainty of the most likely Brexit path, allowing markets to consider more predictable outcomes
  • Consumer spending globally is strong. In the U.S., holiday spending through Cyber Monday increased 16% over 2018.
  • Inflation remains low, and global GDP growth steady, even if not spectacular

Looking ahead, while 2019 has seen strong returns, leading many to automatically assume that poor performance must follow, that is not necessarily the case — Blackrock recently noted that the 20-year returns of U.S. stocks are historically low, and data suggests that future returns from this level are likely to be solid:

Valuations of global stocks remain reasonable based on most measures. International and emerging stocks in particular are attractive relative to the U.S., and as growth outside of the U.S. improves, a currency “tailwind” is likely to be a boost for international returns:

“Value” stocks are particularly attractive relative to “growth” stocks. As the chart below indicates, when considering historical returns, the last 10 years have seen one of the worst relative performances for value since 1937. Anticipating a reversion to a more historical relationship is sensible:

This is not to say that the world is a peaceful and rosy place. Global tensions will continue, and the 2020 election in the U.S. is certain to be contentious and polarizing. Volatility will be ever present. But in the midst of uncertainty, we believe financial assets must still work to meet your goals – trying to time a visit to the sidelines with your money is an impossible task. And while each client portfolio has its own unique aspects, we can provide some general observations. So, where is JFS focusing portfolios in today’s environment?

  • An emphasis on value stocks over growth, on quality companies with consistent earnings streams, and on companies that can return profits to shareholders in the form of dividends
  • Consistent exposure to international stocks, including emerging markets, where valuations suggest superior future returns
  • A focus on high quality, core intermediate bonds without chasing yield in lower quality names — a JP Morgan portfolio manager recently commented they seek to “bubble wrap” bond portfolios to minimize risk — we agree
  • Analyzing and researching less-correlated asset classes such as real estate and infrastructure
  • Staying on target; over the past 12 months we have sought to consistently keep accounts balanced to their bond/stock targets, we have focused on upgrading portfolio core stock investments, and we have allocated fixed income toward highest quality and intermediate maturity

As always, we note that the most successful financial outcomes have their roots in solid planning. Luck is not a substitute for hard work and thoughtful preparation. No matter what the investing climate, a portfolio that is carefully constructed to meet your unique targeted goals, is regularly monitored and rebalanced, and is adjusted as your needs may change, is the best solution.

And on a lighter closing note, here in Western Pennsylvania, as we move deep into December, what really concerns us?

We wish you all a happy and healthy New Year, and are gratified by your continued confidence. On behalf on my Investment Committee colleagues and all of us at JFS, thank you for the opportunity to work with each of you.