First Quarter 2020

2019 was a stellar year for the stock markets.  The Dow Jones Industrial Average posted a 25.3% total return.  The Standard & Poor’s 500 posted a 31.9% total return.  And, the NASDAQ Composite posted a 39.4% total return.  This despite fear of global trade war and recession, deteriorating relations with Iran and North Korea, and political unrest. 

What drove 2019 performance?  Undoubtedly, many things but a few stand out in particular. 

The Fed was perhaps the greatest driver of performance.  As the economy faltered in late 2018, it abruptly reversed its monetary policy.  Instead of implementing the widely anticipated 5-6 rate hikes and downsizing its balance sheet, it cut rates three times and upsized its balance sheet.  A year later, recession has been averted, and short- and long-term bond rates stand around 1.4% and 1.8%, respectively.

Consumers did their share, too.  Unemployment remained at historic lows, driving wages and benefits higher.  This was especially noted at the lower end of the wage scale.  Consumers benefitted from low inflation and low interest rates, fueling home ownership and major purchases.  Household debt service remained low.  Consumer confidence and spending remained strong.  This was (and is) vitally important.  Remember, the consumer accounts for approximately 70% of gross domestic product (GDP), and the strength in the consumer sector helped offset slowing in the agriculture and manufacturing sectors. 

Finally, two major trade deals moved forward.  After languishing in Congress for a year, the United State-Mexico-Canada (USMCA) Trade Agreement[1] passed its final hurdle and was signed by President Trump.  Also, a phase-one trade agreement with China was reached at year-end and signed in mid-January.  This was (and is) a major step forward.  It has been estimated that these two trade deals could add 1% to GDP. 

It’s a New Year and a new decade.  Moving forward, there are several things to watch.  

Just in case you missed it … this is a Presidential Election Year and the gloves are off.  However, it’s worth noting that there have been 23 Presidential election years since 1928 and stocks have posted positive returns (averaging 11%) in 83% of them[2].  Although past performance does not guarantee future results, we do not see anything on the immediate horizon that raises our concern.  Even so, the New Year and new decade is a good time to consider market fundamentals.   

In 2020, corporate earnings are poised to rebound.  Current “street” estimates are up 9%, compared to an anemic 2% in 2019.  This is important because, ultimately, corporate earnings drive stock prices.  That said; corporate earnings and stock prices do not necessarily move in lock step.  Typically, investors “anticipate” corporate earnings and stock prices move in line with their anticipation.  This helps to explain a robust 2019 stock market compared to 2019 corporate earnings. 

Overall, stock valuations remain reasonable.  On an historical basis, the average PE ratio for the S&P 500 Index has been 16.1, whereas its current multiple is 18.7.  So, while valuations are above-average, they are not extreme.

But, some valuations prices may have gotten ahead of the underlying fundamentals.  For example, tech stocks have gone up by 45% in the past two years, whereas their earnings have

The price-to-earnings (PE) ratio equals its price divided by its earnings.  For example, today, Apple (AAPL) has a stock price of $323.00 compared to current earnings of $14.02.  So, its PE ratio is 24.

gone up by only 25%.  By comparison, energy stocks have gone down by 10%, whereas their earnings have gone up by 25%.  This speaks to the importance of owning a well-diversified portfolio and implementing a disciplined rebalancing strategy.

Despite its old age (11 years in March 2020), we believe this bull market still has room to run.  The domestic economy is not too hot or cold, and global economies are showing signs of improvement.  For now, we recommend staying the course.   




[1] Formerly known as the North American Free Trade Agreement (NAFTA).

[2] In 1932, the market was down 8.2% as Franklin Roosevelt beat an incumbent Herbert Hoover.  In 1940, the stock market was down 9.8% with incumbent Roosevelt beating challenger Wendell Willkie.  In 2000, the stock market was down 9.1% with George W. Bush beating Vice President Al Gore.  Finally, in 2008, the market was down 37% with Barack Obama beating John McCain.


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