Review & Outlook
January 15, 2020
But for our part, having kept exposure largely intact through 2019 with a minimum of changes in weight and composition, we anticipate few adjustments in the year ahead so long as the market’s internals continue to be fed with positive breadth and momentum. Though anything can happen, we hope this refreshed optimism can help defer mean reversions, shake off fears, and even help absorb minor exogenous events. Better, the market has a history of climbing “walls of worry”.
What a difference a year makes! In 2018, stocks ran hard for the first nine months (15.6% for client stocks, and 10.5% for the S&P 500 at 9/30/2018) before slamming into the hot fire of a long smoldering Trade War. From there, the 4th Quarter year-end results virtually nullified the whole, leaving us thankful to be flat, besting a softer performance of the S&P 500. This then fed a negative consensus at the start of 2019, but thankfully trading broke out with another monster rally – twice as strong as 2018’s, cranking client stocks to a 28% nine-month advance and 20.5% for the S&P 500. Following this déjà vu, many held their breath as the fourth quarter unfolded, but sighed with relief and slack-jawed amazement at year-end. Fact is, by the lights of our conservative Investment Plans, each quarter offered a full year’s return!
Understandably, this leaves investors with high expectations as they look ahead to 2020. With many of last year’s risks cleared, some measure of the ample cash on the sidelines will assuredly get put back to work, and most will likely flow into stocks. But for our part, having kept exposure largely intact through 2019 with a minimum of changes in weight and composition, we anticipate few adjustments in the year ahead so long as the market’s internals continue to be fed with positive breadth and momentum. Though anything can happen, we hope this refreshed optimism can help defer mean reversions, shake off fears, and even help absorb minor exogenous events. Better, the market has a history of climbing “walls of worry”.
Nevertheless, it’s worth a pause to consider this cycle’s expansion is clearly testing physical limits. Not since the turn of the millennium when so many market indicators similarly ran “better and better” have our contrarian instincts begun to rattle. And as hard as it may be to suggest a dark cloud for the silver lining of record low unemployment, the very real demographic limits set by falling immigration and lower birth rates is already raising labor costs. In addition, without corporate capital investment to build and sustain productivity, capacity constraints could pressure profits as well. This can make for hard choices, a reallocation of resources and management time, and require real talent. All in, the appetite for stocks could reasonably pause.
We think that an echo of these approaching limits is seen in the rising frequency of political car pile-ups on the economic expressway (Trade Wars; Budget Impasses; Monetary and Fiscal Loggerheads; and Tax, Anti-trust and Regulatory wrangles). We take these as measures that hard changes are evolving to reset the longer-term imperatives and benefits that drove globalization over the last generation. And while some of the coming changes will involve undesirable outcomes, likely far more will offer great opportunities as well. Ultimately, we expect that despite pulls to the contrary, the U.S. will recommit to building a new century as it has in the past, based on open, fair, and competitive markets with a leading role for private capital.
For now, we see total portfolio returns trending along the 5% annual center point of balanced Investment Plans. We believe this represents a better basis for assessing your needs than doe-eyed optimism. If you would like to discuss these matters further, please feel free to call.
James W. Mersereau, CFA, CIC
Daniel A. Kane, CFA, CIC