We just completed the final quarter, not only of the year, but also of the decade. This is a good time to reflect back on the market behavior of the past year, and also for the past ten years. The short version is that we have experienced a bull market for the entire 10 year period, with no -20% bear market periods and only a few -10% corrections since June 2009. This seems highly improbable considering that the decade came right after one of the most dramatic market setbacks in modern times.
2019 was an unusual and pleasant year for investors. This, of course, surprised a lot of people (remember – markets are predictably unpredictable). Markets had declined sharply in December of 2018, and virtually erased any gains experienced earlier in the year. Many were predicting that the bearish trend would continue through calendar 2019. However, just the opposite occurred, and anyone who responded to “predictions” by reducing their participation in equities experienced significant opportunity costs. Those who stayed the course experienced well above average gains across the board.
Longer-term, it is certain that we will experience bear market periods and economic recessions. But no person alive can predict the hour or the day. Similarly, nobody can predict when or how the bull market will end, or how deep the next recession or bear market will be. What we feel confident predicting, based on market history, is that future downturns are likely to be followed by upturns that can take the markets and the economy to new highs.
It is important to understand and plan for market corrections and downturns – these events are a routine and expected reality of investing. Not doing so can disrupt the achievement of your goals or your overall financial security. But it is simply reckless to act on gut instinct or what pontificators predict. We advise employing a risk management process that includes choosing not to guess when bear markets will start, but builds risk management into investments and helps plan financially for inevitable market downturns.
Today’s Economic Perspective
According to Fed Chairman Powell the economy is “in a very good place” with year over year economic growth running just slightly under the 10 year post recession trend. Slow, steady growth accompanied by low inflation and monetary policies supportive of business is an economy which is likely to be favorable to equities.
- Slowing growth is due to weakening manufacturing and exports
- Government and consumer spending are strong
- Leading economic indicators suggest continued expansion
- Continued expectations of low inflation
- Consumers are in record strong shape: strong jobs growth, wage gains, savings rates, and booming retail sales.
So What Could Go Wrong?
- Missteps by the Federal Reserve and other central banks can potentially slow the economy or trigger inflation
- Although tensions with China have eased, the strategic relationship the U.S. has with China has been altered
- Presidential politics could roil equity markets in the U.S. and elsewhere. Markets may get skittish in anticipation of what changes could occur
At this stage we do not see signs of significant deterioration in the economic fundamentals that have let the U.S. and global expansion.
Today’s Market Perspective
It’s hard to overstate how unusual this long bull market has been in investing history. Bear markets tend to occur about every 3.5 years, and the previous record between bear markets was 9.5 years.
But age alone doesn’t make market cycles end, and current economic factors create favorable conditions for companies to grow and earn profits. And while short term sentiment can push equity prices up or down in the short run, company earnings ultimately drive stock prices.
Investors were rewarded for exposing themselves to risk 2019. A breakdown shows that just about every investment asset class was up strongly in 2019.
- Large U.S. companies index was up over 31% for the year the year
- International developed companies were up over 18%
- Small U.S. companies were up over 26% in 2019.
In the bond markets, coupon rates have declined further, and some of the rates look quite meager relative to other investments. For example, five year municipal bonds are yielding, on average, only 1.14% a year.
As an investor, it is a good practice to hope for the best, but plan for the worst. In the face of elevated uncertainty and global slowdown, equity markets have remained surprisingly robust. However, to expect returns to match historical averages of the last decade is unrealistic. Forward looking capital assumptions from credible sources, such as Vanguard, anticipate much more subdued returns over the next decade.
Some of the key areas investment strategists will be paying attention to in the year ahead are monetary policy, global economic growth, inflation, and jobs/consumer spending. Until we see changes impacting these factors, economic conditions continue to look favorable.
Markets are inherently volatile, and investment risk never goes away, despite economic and market conditions. A good approach to volatility is to plan in advance for it instead of seeking to avoid it. Now is a good time to take advantage of the recent good times, and position your portfolio to help weather the tough periods.
Part of the advice we offer to help address uncertainty and downturns is to adhere to three key principles (and if you have been a client of ours for a while you have no doubt noted that we continually encourage these behaviors):
- Employ a disciplined investment strategy that is integrated with other elements of your (up to date) financial plan to help manage the impact of short term volatility and taxation
- Manage investment risk through widely accepted practices, such as diversification, re-balancing, and investing according to when you need the money (not by acting on your gut instincts)
- Accept market downturns and corrections as part of investing. Have a distribution plan that doesn’t involve selling equities at the bottom, and allows equities to recover over time
We are committed to providing you objectivity and steady guidance through both volatile markets and euphoric markets – to give you the peace of mind to enjoy your life and focus on what really matters most to you.
Harvest Asset Group, LLC