With another new year only days away, it’s that time when you will likely read about the many highlights (and low-lights) of 2019, and predictions of things to come in 2020. So, I thought it would be timely to write my “Review and Preview” article this month; a lookback at this year’s market and expectations for next.
Review
It’s a toss up to decide which is more surprising about this year in review—what happened, or what didn’t happen. It could easily be what didn’t happen because there was so much market fear and anxiety over what was widely expected to happen that just turned out the other way. Imagine the bull stock market walking into a dark room on its 10th birthday and upon flipping the light switch hears, “Surprise!” That’s what happened this year. The U.S. stock market had one of its best gains in history this year, scoring over 20 new record closing highs. Not expected. In early October 2018, many of the world’s stock indices were making new all-time highs, only to see all the year’s increases wiped away in a severe decline that didn’t end until December 26. During that plunge, the Dow Jones Industrial Average dropped over 19%. Entering this year, three to four rate hikes were expected. Earnings weakness was expected to continue, spiraling into an earnings recession. Worsening global economic slowdown expectations were widespread. Scares of U.S. recession were seen on magazine covers. Forecasts flashed trade a war with China would stall the U.S. economic engine. It did not happen! Instead, well, you know… the unexpected things that did happen.
There has been over $6 trillion in wealth created in the stock market this year. The majors U.S. stock indexes are all up well over 20%–one of the best years in history. Away from stocks, the U.S. bond market was fueled by a dramatic drop in interest rates and had a bull market of its own in 2019. Nothing speaks louder to falling interest rates then the estimated $17 trillion earning less-than-zero interest in global bonds issued by countries paying negative interest. No recession. Global economic slowdown appears over. No earnings recession. Surprise!
Preview
Firing on all cylinders, the U.S. economy and financial markets are soon to enter 2020 full throttle. Capital spending is increasing. Productivity is rising along with the strongest labor market in over 50 years. Trade tensions with China are loosening. And the icing on the cake, the lag effect of the monetary easing of the past year is now kicking in. Today is the first time in more than 15 years that unemployment rates and mortgage rates are both below 4%. That is a great set up for borrowing, business profit expansion, and consumer spending. The stage is now set for a turn to the upside for 2020 corporate profits as the global economy begins the fourth mini-cycle rise of this record-long expansion. This situation could be called the Goldilocks Economy. But there is no perfect porridge. Let’s not throw caution to the wind.
Some caution about the year ahead is warranted. There are potentially big hurdles to clear for financial markets and the economy in 2020. Geopolitical risks and uncertainty, and the U.S.-China trade war are high on the list. Almost 8 in 10 investors polled in a recent survey expect higher volatility next year and nearly 3 in 4 investors believe the investment environment is more challenging than it was five years ago. The 2020 Presidential Election is likely to keep the markets in its grip for the first 10 months and three days of next year. The election effect will likely impact markets beyond November 3, especially if the markets react anything like they did in 2016. Already, many analysts and market mavens are predicting a 25 – 30% drop for stocks should Sen. Elizabeth Warren win White House residence. Conversely, others forecast that a Trump re-election would trigger a 20% jump in the S&P 500.
Everyone has the brainpower to make money in stocks. Not everyone has the stomach. Peter Lynch.
With most of 2019 behind us and 2020 ahead, it may helpful to borrow from 2019’s playbook: Expect the unexpected.
Wishing you a Merry Christmas and a Happy New Year!
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