To many investors’ surprise and delight, equity performance in 2019 more resembled 2018’s post-Christmas rally than its pre-Christmas meltdown. Headlines of the pending recession that sent investors to the sidelines on Christmas Eve 2018, slowly were replaced by cautious optimism.
Make no mistake, some of the negativity that resonated just one year ago persists today. The S&P 500 closed 2019 + 31.5% and yet the most common headlines include:
- Trade Uncertainty
- Low Yields (and negative yields in Europe)
- Impeachment and the 2020 Election
- Brexit uncertainty
- Modest economic growth
For more than a decade the naysayers have doubted and questioned the forward-looking trajectory and direction of equities. They’ve questioned the strength of the US consumer and the resilience of American businesses. Over the last decade, those willing to put aside their fears and recognize noise and headlines for what they are, have been handsomely rewarded for their discipline.
“The individual investor should act consistently as an investor and not as a speculator.” – Ben Graham
In our 2019 Outlook, we projected that European economic and political challenges would persist, US economic growth would be 2-3%, further bouts of volatility would surface, and that big bets were not warranted.
So how did our outlook fare?
Europe remains challenged (and their equity markets remain relatively inexpensive), growth continues at a modest but healthy pace, May and August selloffs spooked a few investors, and a diversified portfolio fared well in 2019.
Below are a few of the key highlights of 2019:
- US Equities surged double digits in Q1 & Q4
- The US Federal Reserve cut rates 3 times (after raising 4 times in 2018)
- The yield curve inverted (briefly) and prognosticators came out of the woodwork to explain why investors should care
- China and the US held trade talks, a lot of trade talks, with a Phase 1 deal in place
- The USMCA agreement was struck on same day as formal impeachment charges are brought
- IPO’s had a mixed year — BYND soared to 245, only to fall back below $80 while PINS, LYFT and UBER disappointed
- Boeing and Big Tech came under scrutiny for very different reasons
The year wasn’t simple, easy, nor boring; but for those who remained disciplined it was rewarding. As one heads into 2020, we urge you to step back, assess goals and risks, and step into 2020 prepared for another year of headlines and tumult. Those are almost assured!
What lies ahead in 2020?
Most any discussion of 2020 begins by trying to anticipate what’s next for President Trump. The President faces impeachment hearings and a heated bid for re-election in 2020. President Trump and the ongoing dialogue with Chinese President Xi Jinping will again be centerstage. And let’s not forget the President’s frequent jabs at Fed Chairman Powell…we don’t suspect those will go away in the next twelve months.
No matter how much power he wields and how many fiery “barbs” he tweets, President Trump alone will not be the sole topic of discussion and driver for 2020. We see continued innovation and focus on efficiencies. Despite uncertainty around trade, business have found ways to drive down costs, improve their balance sheets, and retain and reshape their workforce.
In the eyes of many, the US economy has defied the odds for a decade of reasonably steady and sustained growth. Traditional thoughts on how the economy grows and when it may stumble are being challenged by the developments of the last decade. Inflation, just two years ago feared by many, remains persistently below the Federal Reserve’s 2% target.
For a glimpse of why, consider these innovations of the last 20 years:
- Mobile devices & connectivity
- The iPhone was launched in 2007
- Logistics & Supply Chain (Amazon, etc.)
- Social Media
- Facebook launched in 2004
- Big Data & Search
- Cloud Computing & Storage
- AWS in 2006
- Energy Exploration (fracking)
- Genetic sequencing & biotech innovation
- Human Genome sequenced in 2003
With 2020 upon us, it’s only appropriate to reference a 2020 vision. A look forward will reveal remarkable innovation on the horizon in the areas of 5G, Artificial Intelligence, 3D Printing, Genomic research, battery technologies, and more. Unquestionably, these will continue to change the ways we go about our daily lives.
How are investors to profit from these advancements in 2020 and beyond? Aren’t these new technologies and advancements fraught with uncertainty and a long list of winners and losers? Isn’t this similar to the late 1990’s? In a word, YES, but with an asterisk!
While 2020 is a nice round number, the beginning of a new decade, as investors its simply another chapter of a lifelong “book” of investing. 2020 has the benefits of the lessons learned in all of the years that preceded it, including the late 1990’s and the 2008 meltdown. Years are landmarks, not stopping points. Most often, there’s no magic “to do list” just because the calendar flips to a new year.
The driving force behind market performance in 2020 is most likely to be corporate earnings growth, regulatory trends, and geopolitical developments. Having a diversified portfolio should dampen the impact of any one wrong assessment and may offer exposure to a contrarian idea you may not have consciously selected (Europe, perhaps?).
As exciting as it is to turn the page on another calendar year of gains and start fresh, we believe 2020 will be another year where discipline and diversification are rewarded. Riskless investments are without great reward. Our job is to help properly align your risks with where we believe you are most likely to be compensated. We don’t expect equities in 2020 to repeat the performance of 2019, but still see reason disciplined exposure and cautious optimism.
Investing for the next 20 years
In 1899, the head of the US Patent Office, Charles Duell, boldly proclaimed that “Everything that can be invented has been.” While some argue the context of the quote, its words clearly ring almost laughable today.
I distinctly recall a conversation in the early 2000’s when I said there’s no way people will pay $250 for a phone. I too was mistaken!
It’s easy to look backward and point to innovation, but far more difficult to anticipate and capitalize upon it. The same holds true for investing. Some of the more seasoned investors may recall the Nifty Fifty that was prominent in the 1970’s.
Modern Portfolio Theory and the resulting asset allocation models that developed in the 1990’s were positioned to insulate investors from the dramatic ups and downs of the market’s ride. Then 2008 arrived and the results were less encouraging than most had hoped. Correlation between asset classes rose and the diversification benefit declined.
It wasn’t that diversification failed, but it’s our belief it failed to go far enough. What is an investor to do as we look forward to the next twenty years of investing? What goes further than diversification? For our clients, we advocate an approach we call Strategy Diversification.
When Asset Allocation became a buzzword a couple of decades ago, everyone was introduced to its visual representation: the pie chart. Showing that investors owned Large and Small Cap, US & Non-US, Growth and Value, Stocks and Bonds was powerful and often reassuring.
Our pie chart simply has 4 wedges. The size of each reflects a client’s unique goals and needs. Some investors may only have 3 components. The 4 components are each designed to add value during different market environments and each help manage RISK in a distinct way.
- Macro: over-weights and under-weights asset classes, countries, etc. based off our market assessment and research
- Plays defense by seeking to reduce or avoid exposure to low risk/reward areas of the market
- Fundamental: driven by stock-level research and thematic trends (i.e. genetic research, 5G)
- Plays defense through security selection and its ability to go up to 50% cash
- Technical: driven by market trends
- Models may go as low as 0% equities and up to 70% cash
- Alternative: seek returns through non-traditional exposures or underlying assets; will include private stock, structured products, hedge funds, and more
- Defense can be primarily from manager skill (hedge funds and private stock), or security construction (structured notes)
For the last decade plus, owning equities has been the key to investor success. We believe HOW one owns assets and with whom (manager talent) will again resurface as keys to success in the next decade. Playing defense shouldn’t ever be ignored nor discounted.
Over the last 20 years, the number of publicly traded US companies has shrunk by nearly 50%. That trend may continue. We believe there’s merit to stepping outside the box to achieve returns in the years ahead.
We firmly believe that the investor who remains focused upon his own personal goals/ return needs is far more likely to achieve success than the investor looking simply to outpace an index. Our responsibility to provide the roadmap and the investment solutions to meet your specific goals.
the client experience…
As we begin 2020, it is our plan to provide a significant number of opportunities for client engagement and education. Listed below are a few of our upcoming and planned events:
- 2020 Outlook: January 21st in Greeneville, TN
- 2020 Outlook: January 30th in Knoxville, TN
- Top Golf Simulator Experience February 6th
- Serenity Shelter Care Bags (late February)
In order to ensure that you receive an invitation to those that interest you, we need your help. Early in 2020 we will be conducting a VERY BRIEF survey of client interests, ranging from charitable organizations you support to types of events you’d have an interest in attending. Participation is 100% optional, but with your help, we hope to enhance our client experience in 2020.
We are extremely grateful for your business, your trust, and the consideration of referring us to a friend. Please contact our team with anything we can do to make your client experience better.