Quarterly Market Review and Outlook
2019 Economic / Market Re-Cap
2019 represented an unusual set of circumstances as most financial markets delivered robust returns
with only minor moments of stress. Typically, we would anticipate a couple of bouts of turmoil or a
couple of asset classes underperforming. Instead, 2019 was a bit of an anomaly in comparison to the
last 25 years. Not only did most every class produce above average returns, but there were only short
periods of very minor volatility.
For 2019, the U.S. stock market (as represented by the S&P 500) had its best year since 2013.i Foreign
stock markets generally lagged the U.S. market, but they also had their best year since 2013.ii The U.S.
bond market performed well mostly due to the Federal Reserve renewing interest rate cuts and was up
over 8% for the year.iii
In summary, there was very little to complain about in 2019. Stock and bond markets produced positive
returns and there was very little gnashing of teeth to get those returns.
The primary question is what will 2020 hold for us?
Interest Rate & Federal Reserve Update
The Federal Reserve made an abrupt course correction in 2019 by cutting interest rates three times.iv
As we discussed multiple times last year, a large motivation for these cuts was the inversion of the
interest rate yield curve and the historic correlation between inversion and future recessions. Said
plainly, the Federal Reserve wanted to undo some of what was done in 2018.
The good news is that both the stock and the bond market seemed to like those steps as they responded
positively since the time of the initial rate cut in August, 2019.v Investors tend to feel a sense of ease
when it appears that the Federal Reserve is going to remain supportive by lowering or maintaining
interest rates. Thus, they are willing to accept more risk.
Currently, it appears that the Federal Reserve is going to take a wait and see approach on further
interest rate actions until at least late summer 2020.vi This seems appropriate to us for a couple of
reasons. It does not appear that the economy is overheating or that inflation is an issue. Nor does it
appear that a recession is likely in the cards in the short term. Further, from a historical perspective, the
Federal Reserve has been reluctant to do much during election years. Since their actions have the
potential to have a large impact on the economy, we would suggest that the Fed is likely to remain
neutral for as long as they can in 2020.
Reelection Presidential Election Years
You don’t have to be a carnival mind reader to guess what is on most folk’s minds as we enter 2020—the
Presidential election. It is likely that financial markets and the economy will be under a stronger than
usual microscope. Whether you love Trump or you hate him, he is a polarizing figure and the fireworks
could be big at times.
We believe it’s a mistake, however, to place too much fear and interpretation over the potential for a
market crash this year because of the election.
First, in only two (2000 & 2008) out of the last 10 presidential elections years has the S&P 500 produced
a negative return.vii Obviously, that means that 80% of the time over the last 40 years, the S&P 500 has
been positive during an election year. An election year does not equal poor market performance—quite
Second, we would point out that during both 2000 and 2008, the US economy was either already in a
recession or was at the beginning stages of a recession. We would suggest that the struggling economy
was the real culprit behind the 2000 and 2008 market turmoil rather than the presidential election.
Currently, we see very little data to support the case of a recession hitting the US economy in the short
Finally, it seems appropriate to briefly touch on the upcoming President Trump impeachment. In modern history, we have two instances to examine (Clinton and Nixon). During both impeachments, the financial markets did experience a period of turmoil. However, the US economy was already in recession when Watergate broke thus having a more significant impact than the political circus. During Clinton’s
impeachment, the economic turmoil was relatively short-lived.
We would remind you that, so far, the market has not concerned itself with the impeachment as the U.S.
stock market is near an all-time high. We would not be surprised, however, to see more volatility in
markets during the heart of President Trump’s impeachment. If the economy remains solid, corporations remain profitable, trade disputes don’t run off the rails, and the Federal Reserve stays accommodative, we’d anticipate market declines to be short and within the range of what is a normal market correction.
Global Trade Update
One of the most discussed global economic events in 2019 was the ongoing trade dispute between the
US and China. It is likely that you read viewpoints from various “experts” that ranged somewhere
between the zombie apocalypse to this is a non-issue. Clearly, the zombie apocalypse hasn’t occurred.
As we discussed several times in previous writings, it seems logical that China has more to lose in this
dispute than the US. We buy a lot more stuff from China than China buys from us. Companies with
factories located in China are going to figure out how to remain competitive even if that means leaving
China to find cheaper labor costs. Many companies are leaving China for that reason.
There were reports in December that we may sign an initial trade agreement at some point in January.viii
In our mind, this at least represents progress. We will have to wait and see if a deal is agreed upon,
signed, ratified by Congress and upheld by the Chinese.
We still have a way to go, but the bottom line for us is it seems like, in the aggregate, we are winning the
trade war with China.
In other trade news, the House finally passed USMCA in December after over a year of foot dragging (I
guess they had more important business to attend to).ix This is the trade agreement that replaced NAFTA with Mexico and Canada.x We understand this will be an improvement over NAFTA for the U.S. and will help continue the economic growth we have been experiencing.
While we believe that the stock market will not provide the same returns we received in 2019, we continue to believe that the stock market offers the potential for a better long-term return opportunity than other asset classes. Further, we continue to beat the drum that in absence of a recession, stock market corrections should be viewed as buying opportunities. In fact, many of the economists and money managers that we have long consistently followed tend to agree (hopefully you will recognize a few of these names from previous communications):
The Kiplinger Letter: “There will be no recession in 2020.”xi
Bob Brinker: “Based on our calendar year 2020 S&P 500 Index operating earnings estimate of $177, the index has the potential to trade into the mid-to-upper 3300s range this year.”xii
BlackRock: “Our outlook is for another positive year for the S&P 500, though 2019 will be difficult to match.”xiii
First Trust: “We anticipate that the 10-Year Treasury yield will finish the year at 2.5%. Using 2.5% (instead of 1.85%) suggests an S&P fair value of 3775.”xiv
We will continue to monitor the present set of circumstances and will advise accordingly.
Thank you for your continued trust, confidence and business.
We have significant growth plans for 2020 and would appreciate you referring us to a family member, friend, or business associate who may benefit from our services.
We hope that you and your family have a blessed 2020!
xi “The Kiplinger Letter: Forecasts for Executives and Investors”. Volume 96, Number 52. December 20, 2019.
xii Brinker, Bob. “Bob Brinker’s Marketimer”. Volume 35, Number 1. January 6, 2020.
xiii DeSpirito, Tony. “Taking Stock: Market Views from BlackRock Active Equities.” Q1 2020.
xiv Wesbury, Brian, Stein, Robert, Elass, Strider, Opdyke, Andrew & Gill, Bryce. “Monday Morning Outlook”. First Trust. December 16, 2019.
Securities offered through First Heartland Capital ®, Inc., member FINRA/SIPC. Advisory Services offered through First Heartland ® Consultants, Inc. Walker, Higgins & Associates, LLC and Walker, Higgins & Associates Wealth Management, LLC are independent of First Heartland Capital ®, Inc. and First Heartland ® Consultants, Inc.