EQM Capital LLC 4Q 2019 Market Review – So Much for Predictions as 2019 Ends up a Banner Year for the U.S. Market.

Posted on Jan 6, 2020

The U.S. stock market ended 2019 with an abundance of cheer, as a Santa Claus rally propelled the stock market to the best year of market returns since 2013.  The S&P 500 finished the year up 28.9%, the NASDAQ Composite gained 35.3%, and the Dow Jones Industrial Average was up 22.3%.  Apple and Microsoft were the biggest contributors to the S&P 500’s market gains in 2019 and over the last decade as well.  While the Dow Jones lagged the other indexes, it also had its best year since 2017. 

The record-shattering ride in 2019 was certainly a bumpy one. The U.S. stock market was the mirror image of last year at this time when investors were fearful that an economic recession was looming.  China trade wars were escalating and the Federal Reserve had hiked interest rates four times in 2018, seemingly oblivious to signals warning of a global economic slowdown.  As a result, there was a sharp stock market selloff at the end of 2018.  The S&P 500 was down nearly 20% by December and teetering in bear market territory. 

Fast forward to 2019. The Fed reversed course with a trio of rate cuts. The market overcame a late-summer swoon in August when the yield curve inverted, as short-term rates fell below long-term yields, which is often predicts a recession.  But alas, third quarter corporate earnings boosted market confidence and the China trade war culminated in a phase-one deal, avoiding tariffs on consumer products like the Apple iPhone just in time for Christmas. Not even the year-end threat of Presidential impeachment could curb market enthusiasm. 

With market clouds dissipating, it appears game on for the stock market going into 2020. This provides the perfect example of how “time in the market”, is more important than “timing the market”.  Investors who panicked last year at this time, or over the summer, likely did not fully participate in the record market gains of 2019.

There is evidence that headwinds are fading for the global economy as well.  After a few years of divergence, the Fed, the European Central Bank, and the Bank of Japan are all working together.  The U.S. dollar has also come down a bit, which is a positive for emerging market countries burdened with U.S. dollar denominated debt.  The U.S.-China trade war now appears constructive instead of destructive.  And Brexit seems a go now that Prime Minister Boris Johnson’s Conservative party has secured a majority win in the U.K. 

One big wild card in 2020 is the upcoming Presidential election.  While a strong economy and stock market rally does not assure a Trump victory, it does make him harder to beat, especially given the Democratic agenda which calls for repealing tax cuts and sweeping health care reforms.  The Fed will likely be on hold at least through the 2020 election, with room for one more rate cut should it be needed. 

A U.S. air strike, killing a top Iranian general was new year’s reminder that geopolitical uncertainty remains another market wild card. However, according to a study by Kensho analyzing market reaction to the last 20 Middle East crisis events over the last three decades, stocks and oil tend to outperform defensive assets such as gold and Treasuries after major crisis events in the Middle East.  Barring a major escalation, the backdrop for the market remains favorable.

Here are a few simple strategies we continue to advocate for in the coming year, to mitigate risk and maximize returns:

Stay diversified!  Maintain a diversified balance of non-correlated assets, tailored to your risk tolerance, time horizon, and financial goals. 

Rebalance!  Trim the winning asset classes, and top up the losers, to sell high and buy low and take advantage of reversion to the mean. 

Remain invested!  While it might be tempting to try to time the market in the face of uncertainty, time in the market, instead of timing the market, remains the winning approach.

Happy 2020 and here’s to a happy and prosperous new year!

Disclosure

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