Eyes Shift to a New Year and New Decade!

Here we are… the final day of 2019 and 2nd decade of the 21st century.  The recent year provided stocks with their best annual performance in six years, but what a decade it’s been!  The current bull market has endured over its entire tenure, albeit like most trends it was not without many periods where it looked over.  If there was just one theme to characterize the economy and market direction over the recent 10 years, it would be “uncertainty”.  Uncertainty and relentless skepticism was borne from a sub-par economic recovery; financial repression via historic-low interest rates; and what feels like extreme political unrest both in the US and abroad.  But, financial markets often climb a wall of worry.  2019, and this current bull market, are testament to why time is each investor’s greatest ally and that one cannot allow themselves to invest based upon headlines or emotion.  Investment success is all about “time in the market”, not “timin’ the market”.

Eyes now turn to a new decade and 2020 more specifically.  What might be in store?  Some key themes we are monitoring:

  • The current bull market is old; but fundamentals including corporate earnings, economic growth, consumer confidence, and interest rates are what determine the path of markets, not age or averages. Historically, strong annual performance (such as witnessed in 2019) begets additional favorable performance – although it is hard to envision any way in which the approaching year could be as intensely strong given other dynamics touched upon below.
  • Monetary policy both in the US and around the globe appears to again be supportive. The Fed abandoned a path of raising interest rates at the beginning of 2019 as the yield curve (and a fit from the financial markets) began signaling in 4Q’18 they were too tight; they cut rates 3 times, and most recently communicated they will be on hold until inflation would become worrisome (either too strong, or too weak).
    • As a result of more accommodative monetary policy both in the US and globally, the supply of money (as viewed through M2) began expanding at an annual pace of around 10% in recent months. An expanding money supply provides a backstop to the economy, and is stimulative of financial assets – especially when economic growth is otherwise sluggish and not requiring all that new capital to finance real expansion. 
      • In 2018 following tax reform and a surge in corporate profits, money supply was weak as the Fed pursued a series of rate hikes and shrunk the size of its balance sheet – together the actions were making monetary policy too tight amid uncertainty related to tariffs/trade and global uncertainties. Result: The US economy dramatically outperformed the stock market and the yield curve flattened.
      • 2019 the economy was soft (and appeared slightly recessionary internationally due to trade), but money supply began to accelerate. Result: stock markets around the globe dramatically outperformed the real economy and the yield curve – historically a reliable leading indicator of economic growth – is again steepening.
    • Entering 2020, many geopolitical uncertainties (Brexit, foreign trade, etc) appear to be resolving or improving. Perhaps the mild economic contraction observed internationally is ended?  If so, international will likely not be a drag on global economic activity and instead support a more favorable mood from business leaders.  [Will the economy “catch-up”, require additional capital, and outperform the markets in 2020?]
      • International equities persistently lagged US counterparts over the last 10 years; the S&P500 outperformed the MSCI world index by +0.7% per month on average over the last 10 years… this is a HUGE disconnect that should someday narrow. We continue to believe foreign is a more attractive value and better forward-looking return opportunity than US equities (more expensive) entering the new decade.  But timing is of course highly uncertain.
    • US political theater was ugly for most of the last 10 years. Unfortunately, this theme will not diminish in the New Year – especially with a highly partisan impeachment inquiry in progress and a presidential election just 11 months away.  Historically, financial markets do fine during election years, but often pause in the summer months.  Also, history reveals that which party wins is largely irrelevant to the overall market’s direction (again, it was the broad economic fundamentals that determined overall path); that said, the result is important and impactful to which companies and sectors do better than others depending on how policies may evolve under one party’s leadership vs another.

As hopefully conveyed through the points noted above, we are constructive on the prospects for the economy and the financial markets moving into the new year; but remain keenly aware that risks/uncertainties remain.  It is important to recall that often some reversion trades (what worked best recently may not continue to do so) develop with the start of a New Year ; on the heels of such strong 12-month performance and more recently the 4Q, the stock market as a whole is due for a pause/breather.  In the very short term, markets appear overbought and probably require a pullback or even an uncomfortable correction.

Most important: keep your focus on fundamentals and the long-term for success in a New Year and New Decade!


Author: Steve Henderly, CFA | Nvest Wealth Strategies, Inc. – 12/31/2019
Posted in Blog Post.