The end of a year is the traditional time to reflect back on the past year and to contemplate on the year to come.
LOOKING BACK AT 2019
It was a very interesting year. All eyes were on the US economy during 2019. The unemployment rate declined from 4.0% to 3.5% through the year which is around the lowest rate in 50 years. The economy grew at an estimated real rate of 2.3% which is a decline from 2.9% in 2018. While not a dynamic rate of growth, it still exceeds the average annual growth rate over the past 15 years. The big news of the year was that the widely predicted recession of 2019 never materialized. Many news reports indicated that you could “see the whites of the recession’s eyes”. The economy refused to participate and these recession fears have faded off.
The previous record for the longest economic expansion of 121 months was topped in July with the current economic expansion now at 126 months and counting. One argument that people use is that the longer the economic expansion, the more likely there will be a recession. Recessions are the result of specific factors and these types of arguments are just “silly”. Australia is a great example in that they have not had a recession in 324 months (27 years).
Both the stock and bond markets had very strong years. This is unusual in that typically when the stock market has a strong year, the bond market does not and vice versa. The Federal Reserve’s surprising reversal of course by reducing interest rates three times last year undoubtedly contributed to the robust bond and stock market returns. These preemptive interest rate reductions, along with the recent tax law changes, played an important role in keeping the recession at bay.
Other factors that impacted markets and economic activity in 2019 include the start of the presidential election campaign, a low intensity trade war between the United States and China, the ongoing drama of whether the United Kingdom would leave the European Union and a slowing economy in Germany. On a worldwide basis, both developed and emerging market stock markets did well but not as well as US stocks. In regard to the US stock market, large growth stocks displayed their dominance on market returns with one fifth of the S & P 500 returns being attributed to just four companies: Apple, Microsoft, Facebook and Amazon.
LOOKING AHEAD TO 2020
The fact that stock and bond markets had a very good 2019 does not mean they will have a bad 2020. Interest rates, economic growth, and geopolitical issues, all of which are interrelated, will dictate what 2020 will bring. The big questions for 2020 will be:
– What will inflation do?
– How fast will the economy grow?
– What will happen to the price of oil?
– What will happen with Iran, North Korea, the United Kingdom and the European Union?
While many will predict what will happen, no one really knows. Our predictions (or rather our educated guesses), are that inflation, while increasing somewhat, will remain below what is desired, unemployment will stay low, the economy will continue to expand at its current growth rate, and the trade war with China will work out in a way that is not too harmful to the world economy.
We believe that investors should hold broadly diversified portfolios of bonds and stocks with a mix that is “all weather”. By “all weather” we mean a mix that supports your long term wants, needs and wishes in both good and bad economic times. We believe recessions are part of the business cycle and they will occur from time to time. Recessions occur when the forces within an economy become unbalanced. The recession then works to correct these imbalances so that the economy can resume its growth. We believe investors are still somewhat “scared” from the 2009 financial crisis, which was much more than a recession. The financial crisis, which was hopefully a once in a lifetime event, should not be allowed to continue to dictate investment strategy.
Our advice for 2020 is to remain broadly diversified and to enjoy the year to come.
As always, please contact your financial professional if you have any questions.