Quarterly Newsletter for the 4th Quarter 2019
All the major indexes had positive returns in the second half of 2019. These returns top off a wonderful year in the equity markets. On a price return basis for the second half of last year, the Dow Jones Industrial Average (DJIA) was up 7.29%, the Standard and Poor 500 (S&P 500) was up 9.82% and the NASDAQ gained 12.07%. Overseas, the MSCI all Country World ex-US Index gained 5.81% and the MSCI Emerging Market Index was up 3.89%. In the fixed income environment, the Barclays 1-3 year US Government/Credit Index showed gains of 1.29% during the third and fourth quarter.
Fixed Income Market (Bonds): The Fed, as you may recall, lowered rates three (3) times throughout 2019. While history does not favor the Fed’s ability to engineer a “soft landing”, it does appear that they have been successful. These rate cuts have rekindled growth, reversed an inverted yield curve (one that only lasted a few days), stemmed off fears of a recession and laid the foundation for a stable economy. At this point, the Federal Reserve does not have any recession forecast and they are not expected to raise interest rates throughout this year. This sets a foundation for a stable Fixed Income market.
US Equity Market (Stocks): Again, 2019 was an excellent year for the US stock market and yielded some impressive returns. In point of fact, it was the twelfth (12th) best performance in the markets post WWII era. Certainly, it is possible that the returns of 2019 were aided by the Christmas Eve sell off in 2018 - that sell off, of course, lead to a late year end recovery that continued into and throughout 2019. The United States is currently enjoying the lowest unemployment that we have had in fifty (50) years. We also have the support of massive liquidity from the Federal Reserve, a strong labor market, growth in consumer spending, a strong economy, profitable corporations and little risk of inflation or fear of recession. Phase One of the trade deal with China has also been signed. Fed rate cuts generally take about 12 months to have positive impacts in the business world; thus, the market should benefit from last year’s reductions throughout 2020. Finally, it is an election year and, historically, that has been a good year for the markets. As the markets reach all-time highs, stocks have become “right priced”- not “overpriced”. All of this sets a background for the market to produce positive returns this year.
Overseas Markets (Foreign Stocks): The Overseas markets have been somewhat troubled. This has been the theme for the foreign markets in eight of the last ten years. The effects of the trade wars have weighed heavily on the emerging markets, as they have significantly lagged the US market. We believe that this trend is reversing and that global manufacturing has bottomed. We should see some acceleration in the overseas economy as 82% of global central banks are easing monetary policy. With continued growth in the US economy and the signing of the trade deal with China, we believe that the headwinds against the global economy are fading. Certainly, as compared to the US market, foreign stocks are underpriced - this makes them, by comparison, an excellent value and primed for positive returns this year.
Conclusion: Regarding the US equity (stock) markets, we remain positive. We believe the market will produce positive results this year, but we do not think we will see the gains we did in 2019. In the Overseas equity (stock) market and the Emerging market, we are now positive. Again, given their lack luster results over the past decade, foreign stocks are reasonably priced and, assuming manufacturing does rebound, it should be a good year for overseas investments. The fixed income (bond) environment is stable and the Fed is not forecasting any rate movement - up or down. Thus, we remain positive about bonds - especially the intermediate bond funds with some exposure to longer term bonds.
Permit us to express our sincere appreciation for the opportunity to be of service to you. As always, should you have any questions or wish to discuss the above in more detail, please do not hesitate to contact us.