Once again showing signs of strength
Investors are a nervous group, even more so than consumers. Over the past several years, consumer spending has advanced with the constancy of an upward stair step. The same cannot be said of the U.S. stock markets. In 2018, the stock market may have arguably over-corrected to the downside returning a negative 6.6% as measured by the S&P 500. In 2019, that same index was up 28.9%. As it has done several times since 2009, the ghosts of a new, possible recession spook investors only to vanish as the economy continues its climb.
The slow, steady growth economy that we have experienced since the Great Recession of 2008 has continued setting an all-time consistency record when it passed 10-years of uninterrupted growth in 2019. That same slow, stable expansion is expected to continue in 2020 with real GDP growth estimates remaining around 2%. Unemployment is the lowest since 1969 at 3.7 percent; wage growth is accelerating at 3.1% for production workers; and inflation is a modest 2.1%. It is said that economic expansions normally do not die of old age, they normally end due to an economic dislocation (i.e. sub-prime mortgage loan crisis, excess inflation, etc.); a political/national conflict (i.e. trade conflict or military skirmish) or possibly a combination of events (i.e. the 1973 oil embargo that lead to high oil prices and predictions that GM would be out of business in 10 years as world oil supplies dwindled – facts and fiction combined).
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Returns in 2019 were great
During much of 2019 economic news was mixed triggered by concerns over Chinese and North American trade discussion/disputes, causing many clients earlier this year to assume that returns may continue to trend negative for their portfolios. Yet 2019 stock returns ended well above average. The tech-heavy NASDAQ increased the most at approximately 35% while even emerging markets (China, Brazil, India, etc.), hurt by international trading fears, logged a 15%+ return. Stocks that were slightly underpriced coming into 2019 are now slightly overpriced as we enter 2020. To make 2020 a healthy year for stock returns, we will need continued corporate earnings strength, investor confidence and an economic environment that provides consistency.
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Federal Reserve assistance helped bond returns
Early in 2019 economists were debating whether the Federal Reserve was going to raise rates either 3 or 4 times during the year – a move that was intended to prevent economic overheating and provide “dry powder” in the event the Fed needed to lower rates in future to prevent an economic downturn. As financial events unfolded, economic growth seemed to lose steam and possible rate increases yielded to rate cuts. These unexpected rate decreases boosted bond returns. Cautious bond investors who bought quality, high grade, shorter-term bonds to prepare for rate increases benefited somewhat, but bond investors who purchased lower quality long-term bonds early in the year really profited. Lower quality junk bonds as measured by the U.S. Corp. High-Yield Bond Index were up over 14%.
As we enter 2020, renewed evidence of economic growth have put an end to Federal Reserve rate cuts but few economists expect rate increases unless economic activity has substantial increases. Most economists feel we are likely to experience a protracted period of modest interest rates which will likely translate into an extended period of more modest bond returns.
We continue to closely monitor changes in the bond and equity markets that may impact client portfolios and encourage you to visit with us over the next few months to review your asset allocation and any upcoming monitory needs to make certain your investment portfolio is positioned appropriately.
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Source: Capital Group, RIMES, Standard & Poor's.
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