Monthly Outlook: December 2019 

We hope everyone had a nice Thanksgiving and time with friends and family. There are only 27 days between Thanksgiving and Christmas this year so it’s all going to fly by! Retailers will stuff your mailbox and email with enticements and discounts while CNBC and Bloomberg TV will inundate you with market predictions for 2020. They’ll all be convinced that they’re right and brilliant and that you need to listen! From Fifth Avenue to Wall Street, everyone’s pushing something this time of year.

Around the office we have a favorite saying of “You Don’t Know That.”  It’s used when one of us spouts off some forecast or prediction, usually from the hip. It’s our way of reminding ourselves to stay humble and that predicting markets is folly even though every other firm seems to do it. Luckily for them, no one seems to remember their predictions by year-end so they’re never held accountable. If they did, we’d all see that almost no one predicts very well. So, as you hear a prediction or two these next few weeks, try to take them with a grain of salt and forget them. We find, based on facts and evidence, that’s it’s far more productive to invest based on what markets are actually doing. No predicting or guessing, required.

Will the Fed cut interest rates? Probably, but who knows? We can observe that interest rates are presently in a downtrend, so we can invest in bonds and expect decent total returns. Will the trade tariffs continue or be lifted? Who knows, but we can observe that stocks are generally up-trending for now, so it’s best to stay invested and watchful. Will the current peak valuations of stocks cause the stock market to tumble in 2020? Maybe, but we can observe that investors are not yet ready to sell. We’ll watch for an actual breakdown in the price and trendline before we sell.

Considering the Evidence

It always amazes me how much investment analysts pore over data and reports for clues about what might happen to markets. They’re constantly looking for causation between various inputs to guess what a particular market might do in the weeks and months ahead. If unemployment rises and if earnings forecasts are downgraded, then maybe certain stocks will fall, they posit, for example. And the “if-then” analysis goes on, ad nauseum. But why not look directly at the price trend? Is it, for whatever reason, actually going up or down? If it’s up, buy/hold it. If it’s trending down, sell it and avoid the big loss. That’s what we do and will continue to do.

But what does the evidence actually tell us? In summary, it says that the market is very over-valued and that the global economy is slowing. That ought to lead investors to become more cautious and to sell stocks to lower their risk. But you would be wrong – or early, at best. The price trend for global stocks continues higher and you’d be missing out on gains if you sold too soon. But while we’re staying invested and watching price trends, the evidence tells us to stay highly vigilant and ready to sell. You might remember that last October and December, the S&P500 saw a 9% drop in each month, so price trends can change quickly.

Valuation metrics that matter include TMC/GDP (the Buffett indicator), P/E10 (Yale Professor Shiller indicator), NYSE Margin Debt, and ValueLine MAP. Without getting into the weeds, all four are indicating peak valuations only seen a handful of times in the past 50 years. Economic metrics that matter include ISM, unemployment, corporate earnings, fed funds rates, inverted yield curve, LEI, and confidence. Again, the summary here is that the global economy is clearly slowing. Throw in a bit of political instability that you may have noticed, and there is more market “tinder” than a dry Colorado forest. All it would take is a catalyst or two to spark a market sell-off. But until it does, it’s just potential.

As a money manager, we have to balance risk and reward, constantly. This means that we have to weigh the evidence against the actual price trends of every market. We have to stay invested to make money in the face of potential risks, but always be ready to sell when the trends actually change. With iFolios, this is exactly our strategy. We look for growth and protection at all times, using evidence. And yes, we do know that!