Wealth Matters Newsletter - January 2020

2019 was a remarkable year for investors.  At the time of this writing, with two trading days left in the year, stock and bond markets have provided investors plenty of reason for holiday cheer.  Global market performance was dominated by U.S. markets, though international stock and bond markets contributed to positive returns.  Will investors see a continuation of positive market performance in 2020?  This edition of the Wealth Matters newsletter will address several factors that will likely impact markets as we begin the next decade.

First, the table below provides a snapshot of year-to-date global index returns through the market close on December 26, 2019.

Index Returns as of 12/26/2019

The year-to-date total return of the S&P 500 shown here would rank in the top 13 annual returns of the S&P 500 since 1928.  One year ago, investors were still reeling from one of the worst quarterly sell-offs U.S. markets had experienced in years, triggered by concerns about tightening U.S. monetary policy (rising interest rates) and trade relations.  Here we are one year later and the Federal Reserve has reversed course on monetary policy (having cut rates 3 times in 2019), the United States-Mexico-Canada Agreement (USMCA) is awaiting a vote by the U.S. Senate, and a phase-one trade deal with China is expected to be signed in January.  Market’s barely reacted to President Donald Trump becoming the third U.S. president to be impeached, as investors believe a trial in the Senate will not result in his removal from office.  What factors will influence markets in 2020?  Here are several that we believe warrant discussion.

Consumer Strength

At the end of the third quarter, consumer spending accounted for 68.1% of the U.S. gross domestic product (GDP), according to the U.S. Bureau of Economic Analysis.  Spending on services (such as healthcare) comprise 70% of consumer spending as of November 2019.  The importance of the consumer to U.S. economic growth cannot be overstated, so investors will be closely monitoring the sales results from the holiday shopping season, consumer confidence survey results, and measures of personal income for indications of strength or weakness in consumer spending behavior.  Disposable income and savings rates have increased in recent years, so the potential for continued consumer strength remains high.  However, housing is a bit of a headwind for consumers, as rents and housing prices continue to move higher.  Housing inventory remains problematic; we will be watching housing numbers in the first half of the year.

Trade

Trade negotiations with China were a major topic of discussion in 2019 and is likely to remain a hot topic for at least the first part of 2019.  As mentioned earlier, we are waiting for a phase one deal with China to be executed in January.  The primary result of any trade deal is the removal of uncertainty.  The uncertainty that resulted with the trade impasse with China, not necessarily the tariffs, was the biggest negative.  Manufacturers with facilities in China were left scrambling to find alternative sources of production or resources, as they felt it would be difficult to pass along increased costs to their end consumer.  Consequently, business confidence and investment suffered in 2019, as gross domestic investment fell in the second and third quarters of 2019.  Though much of the media attention on trade focused on China, it is important to note that trade with Canada and Mexico is nearly double the dollar volume of trade with China. That is why the USMCA trade agreement may be more important to business investment and economic output, at least in the short-term. Removing uncertainty with trade relations, particularly with two of our biggest trade partners, should help improve business investment.

Earnings/Valuation

Stock prices moved significantly higher in 2019, outpacing earnings growth by a wide margin.  As a result, stock valuations (as measured by the price/earnings multiple) have become a bit stretched.  Stock prices can continue to move higher – investor sentiment remains strong and low interest rates support stock prices; the risk of a correction increases without support of earnings growth.  Earnings growth in 2019 was largely a disappointment, but year-over-year earnings comparisons in 2020 should be a bit easier.  We are also watching a shift in investor appetite for higher quality stocks – sustainable earnings growth, low or reasonable debt, and dividend payers – from the high growth only attitudes that have driven market returns over the last several years.

Presidential Election

Presidential election years typically contribute to higher levels of market volatility as investors attempt to assess potential changes to current policy and its impact on their investment thesis.  This year will be no different, especially considering the contrast in policy stances between the Trump administration and leading candidates from the Democratic party.  Reductions to personal and corporate tax rates and reduced regulation have undoubtedly played a role in moving markets higher since the last election.  Numerous well-known and respected money managers have offered gloomy predictions for market returns should any leading Democratic candidate win the election, reflecting likely policy changes rather than political leanings.

2020 has all the potential to be a continuation of the longest expansion in the U.S. history, but as you can see, there are hurdles as well. I hope your holiday season was filled with joy and wish you happiness and health in the new year.  

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