Monthly Outlook: January 2020
Happy new year! 2019 was another good year for investors with gains coming from both stocks and bonds. Markets ended the year near their highs but, once again, the destination doesn’t tell us much about the journey. Does anyone remember October to December 2018 when the S&P500 lost 15% in just three months? Luckily, the S&P500 bounced back in early 2019 and was back to even by March. Then markets flip-flopped sideways from March to September. Finally, with help from the Federal Reserve, stock markets started to rally again in October and that has lasted into year end.
That dip-rally, then flip-flop, cycle was challenging for us as we constantly strive to keep our investors fully invested in the up-trending markets and to sell/trim the down-trending markets. Our iFolios strategy is designed to help you grow your wealth and to avoid the big loss. We did that in 2019 but we had to trade more often than usual. European stocks, for example, flip-flopped around its trendline seven times! US large value stocks flip-flopped five times. Many years we’ve only had one trade for a given market so you can see how unusual 2019 was. It was a volatile journey, even though the destination ended up positively.
Bonds, on the other hand, were strong and steady performers, requiring no trades. We simply maintained our fully-invested positions and enjoyed the gains. The Barclays bond index gained about 8% in 2019 as interest rates generally declined. The 10-year U.S. treasury bond rate dropped from 2.69% in January to 1.89% at year-end. We expect further interest rate declines in 2020 and, therefore, continued gains from bonds.
What Do We Know in January 2020?
In order to think about potential outcomes in 2020, it’s useful to assess what we know for sure today. Valuations of stocks remain at peak levels, similar to 2008, 2000, and other market tops. That’s just a measurable fact. But there hasn’t been any catalyst that has changed investor sentiment enough to trigger any selling. In fact, the Federal Reserve seems to be helping to buoy the markets. Employment is still strong, with the unemployment rate at a decades-low 3.5%. Corporate earnings have been decent, although they’ve been slowing the past two quarters. 3rd quarter 2019 earnings were actually 6.5% lower than they were in 3rd quarter of 2018, but no one seems to be talking about that. Global politics remain wobbly, at best. Brexit seems to be moving forward again. Trump has been impeached though it appears the Senate won’t care. And what about the November 2020 U.S. presidential election? We know we’re going to be obsessed with that for almost the whole year.
We know that a lot of economic data is pointing to a global slowdown. We can see it in trade data, shipping rates, CEO confidence, inverted yield curves, stalling house prices, declining auto sales, etc. The data is there. But investors just don’t seem to care, at least not yet. Why? Is it because they believe global central banks are flooding markets with liquidity and will do whatever it takes to avert a recession? Are global central banks even that powerful? Is it because investors know about some optimistic plan so they’re looking across any short-term concerns? Or is it possible that investors are just irrationally exuberant today and risk staying at the party for too long? We can’t know the answers to these questions, yet. But we do know in January 2020 that 1) stocks are wildly over-valued 2) the global economy is slowing and 3) investors remain optimistic anyway.
Our Plan for 2020
Our primary rule for investing is to invest with the trend. And the trends for nearly every market remain up as we enter 2020. But we’re acutely aware of the valuations and slowing economy that could change the trends to down, and could do so in a hurry. We have a strong track record of protecting our investors from the big loss, when needed. Some of our clients encourage us to fight for more growth. Some tell us to focus on avoiding loss. We intend to do both. We have our eyes wide open as we move into 2020 and you can trust us to keep you invested appropriately.