2019 was a party for stock investors. Most equity asset classes broke double digits with many exceeding 20% gains for the year. HCM equity portfolios fully participated in the fun. But, don’t let the calendar year spotlight fool you.
Remember that stocks corrected in late 2018, with the S&P 500 losing nearly 20% of its value from its peak in September, to its trough on Christmas Eve. So, even though 2019 was a good year for equity investors, part of those attention-getting returns were making up for the decline in late 2018.
Longer Term View- Instead of looking at the markets in short one-year time frames, we will make better wealth management decisions by looking through a wider lens. To make my point, let’s ignore compounding and dividends for the minute and simply look at average point to point returns for the S&P 500 for the last:
Two Years 12.25% Average Return
Five Years 11.93% Average Return
Ten Years 13.89% Average Return
Twenty Years 7.55% Average Return
The average annualized return of the S&P 500 over the last 90 years have been between 5% and 10%, yet actual returns rarely fall into that range. They tend to overshoot and undershoot. For this reason, the wise retiree will plan to manage the markets’ natural volatility by building reserves when the markets are in their manic stage, so they can take advantage of higher yields and cheaper prices when stocks go on sale. HCM does this with our HCM Safety Net™ System.
Enough for the history lesson. Everyone still wants to know if the party will continue in 2020.
Or put another way: Can this bull market continue? The short answer, with some caveats, is yes.
Why Do We Care?
Some ask, if we are long-term investors why we care what will happen with the markets over shorter periods? The reason is, we actively manage investment risk in our Advance and Defend™ portfolios, and we require an informed opinion regarding potential market outcomes under different scenarios to properly manage the tactical exposure in our portfolios.
Since 1950, there have been 15 years when the S&P 500 has returned over 20%. Of those 15 occurrences, 12 (or 80%) had positive market returns the following year. If we were just going off those statistics, the chances of seeing a positive 2020 seem pretty strong. But, and repeat after me, past performance is never a guarantee of future results, so just pulling up past market stats and extrapolating them forward is more for entertainment than sound investment strategy. It is like dreaming about what you will do with your lottery winnings before the winning numbers have been drawn. While the HCM Investment Committee has seen improvements across several of the data points we follow, there are still some lingering questions that remain unanswered.
We have gained more clarity on the tariff negotiations with China and how the Fed will move forward with interest rates. The combination of a “Phase 1” deal with China and a Fed that seems committed to remaining accomodative has removed the worry of a “worst case scenario” for investors and has given them the confidence to take on more risk. This increase in risk taking has resulted in money flowing into the equity market through year end and into the beginning days of 2020. Any change in those two factors could spark renewed volatility, but it doesn’t seem that anything is imminent on those fronts.
The area of most immediate concern is the Middle East. Recent events between the US and Iran have moved geopolitics back to the forefront. While market reaction to date has been somewhat subdued, the rumblings of a potential military conflict are enough to keep market participants sensitive to any further escalation of the situation. After a solid 2019, it could set up the perfect scenario for profit taking and some short term volatility. With the Fed holding rates steady in the foreseeable future, we expect a return to more normal market action with several 5% to 7% “mini corrections” during the year. Barring a change in the expectations for continued divided control of our federal government through the election, we would see these corrections as opportunities to add to our equity exposure.
For now, HCM is encouraged by the improvements we have seen across our focused investment themes (China, Fed, economy) and the strength of corresponding price trends. We believe these conditions present an opportunity to begin to modestly increase the risk profile of our stock exposure. We continue to maintain our neutral model targets for equity and fixed income and will re-balance to those targets as opportunities present themselves.
Weekly Focus – Think About It
“Bull markets are more fun than bear markets”
Performance last week for the four major asset classes were:
- U.S. Stocks – Russell 3000 (IWV) – Loss of -0.12%
- Developed Foreign Markets (EFA) – Loss of -0.53%
- Emerging Markets (EEM) – Loss of -0.31%
- Fixed Income (AGG) – Gain of 0.34%
(Note: performance is based on the change in price plus dividends)
Last Week’s Headlines
- A military strike by US forces killed Iranian General Qasem Soleimani and re-newed tensions between the two countries. Market prices dropping intially on the news, but have since stablilized, with oil and gold continuing to gain.
- A slump among maunfacturers deepened in December as the ISM manufacutring index slid to 47.2 last month, down from 48.1 in November, and well below the 50 level that denotes expanision. It is also the lowest reading since June 2009.
Eye on the Week Ahead
- US nonfarm payrolls data for December will be in focus. Consensus estimates point to an increase of 172,000 jobs and would indicate a solid labor market
- US Services and PMI data could help shed light on the state of the consumer sector
If you have questions about the recent price volatility, please contact a member of HCM’s Wealth Advisory Team:
Mike Hengehold (Mike@HCMWealthAdvisors.com)
Casey Boland (Casey@HCMWealthAdvisors.com)
Jake Butcher (Jake@HCMWealthAdvisors.com)
Jim Eutsler (Jim@HCMWealthAdvisors.com)
Greg Middendorf (Greg@HCMWealthAdvisors.com)
Steve Hengehold (Steve@HCMWealthAdvisors.com)
Doug Johnson (Doug@HCMWealthAdvisors.com)
Any tax or other advice contained in this document, including any attachments, is not intended and cannot be used for the purpose of avoiding penalties under Internal Revenue Code. No action should be taken on any information contained in this message without first consulting with your tax/legal advisors regarding the tax/legal consequences for your particular circumstances.
- The Standard & Poor’s 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general.
- Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance.
- Past performance does not guarantee future results.
- You cannot invest directly in an index.
- Consult your financial professional before making any investment decisions.
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