What a difference a year makes! Entering 2019, investors were fearful of slowing earnings, a fairly brutal 4th quarter market sell-off, and a Federal Reserve that had been hiking interest rates while oblivious to slowing economic conditions. An escalation of trade tensions with China, the world’s second-largest economy, combined with Britain’s potential exit from the European Union and a yield curve inversion simply added more uncertainty than most investors could handle. Fast forward to the end of 2019 and virtually every financial asset has performed well (see chart, below). Equity markets were hovering near all-time highs and the S&P 500 rose 31% – its best annual gain since 2013. Even safe-haven assets such as long-term Treasuries performed well, and gold notably had its best year in a decade. While there were bumps along the way, what mattered most was the Fed realizing its mistake and taking preemptive action. The Fed halted its quantitative tightening program in March and began to cut interest rates for the first time in a decade, with the most recent cut occurring in October. Additionally, two positive developments in December ensured a solid finish to both the quarter and decade (the S&P 500 is up more than three-fold since 2010). First, trade discussions with China, previously following a “two-steps forward, one-step back” approach, culminated with a “Phase 1” pact that will reduce tariffs on global trade. Second, U.K. citizens voted in favor of the Conservative Party, clearing the way for a much-needed Brexit resolution.
Exiting 2019, investors appear to have regained confidence as riskier small cap and emerging market stocks were outperforming. Even beleaguered value stocks in the S&P 500 outperformed growth for the first time since 2016, and the additional yield from corporate bonds indicates little worry from investors. While we agree with the consensus that earnings growth will resume in 2020, we also believe this bull market is mature and remain cautious given the difficulty of achieving profit growth while the labor force is tight, tax cuts have passed, interest rates remain low, and balance sheets have been leveraged for share buybacks. Fortunately, it appears the Fed will remain on hold through the election and the global economy will continue to benefit from both easy monetary policy and rising fiscal stimulus, supporting financial assets even at suboptimal prices. We believe investors can position for success in the coming decade by crafting an investment plan to fit their overarching goals and objectives, focusing on tax efficiency, taking advantage of any market turbulence through opportunistic rebalancing, and by staying disciplined in a globally diversified portfolio through any market turbulence.
Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from JNBA Financial Advisors, Inc.
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