Happy Old Year
Next month we will return with the second installment on the two unprecedented changes unfolding in the world today that will have (and are already having) enormous impact on our lives and investments. Last month we discussed the cessation of global warfare and next we will address population growth. But as I write this on New Year’s Eve it is worthwhile taking a quick glance at 2019 and looking ahead a bit to 2020.
U.S. equity markets had a stellar year. The large-cap S&P 500 is up around 28% and the NASDAQ is up 35%. Quite a turnaround from the near bear market we experienced in the month before Christmas last year. That year-end shock was no doubt a repudiation of the Federal Reserve’s tightening of rates throughout 2018. The Fed’s Grinch-like fourth rate hike of the year on December 19 was widely regarded as excessive given the benign inflation numbers and commodity price increases. The Fed’s retreat (lowering the Fed Funds rate 3 times in 2019) was a clear admission (without them saying so, of course) of their earlier overreach. The markets have responded accordingly. The Fed, in our opinion, is likely to remain on the sidelines in 2020. Other tailwinds for the market have been the impact of tax cuts, lower regulatory hurdles in many industries, the replacement of NAFTA with USMCA, and the prospect of better trade terms with China going forward. On the latter, despite the short-term negative impact of tariffs, the market discounts the long term and fairer trade with a growing China will have benefits extending for decades.
All that said, there are always clouds on the horizon. Shaky debt has piled up in the auto loan and lease market. Though maybe not as serious as the housing bubble debt before the last financial crisis, it’s not a good omen. And the national debt continues to grow ominously as the recent spending bill showed no restraint by either party. How long can we continue $1 trillion annual deficits? That’s a topic for a piece later in the year.
But let’s not harp on the negatives today! Look at your year-end statements and enjoy it. Markets never go up forever but every rise is another cushion under our chair. Even a bear market at this point would only take us back to market levels last seen in the deepest darkest recesses of … 2017. Back in 2015 we wouldn’t have lamented if we had been told markets would end 2019 where they actually ended 2017. But we’re now 20% higher than that! Happy New Year!