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2019 Year in Review

2019 Year in Review

| January 27, 2020

S&P 500 31.44%
S&P 600 22.78%
AGG 8.68%
Gold 18.36% (gld)
Global (ACWI) 26.7%
Ex US 21.21%z
Aug 23 both USMV and IVV 20.34 vs 15.01 Agg 8.65 TLT 21.9

2019 was a very strange and wonderful year.  Usually we can look at the market as either a risk on or a risk off scenario.  What I mean is if there is fear in the market, bonds do well and stocks do fare as well.  If everyone is being greedy and the market is going straight up, the defensive investments don’t do as well.  2019 was strange because everything made money.  Were you worried about the stock market? Well, you made 18.36% in gold, or 8.68% in intermediate bonds, or 14.12% in long bonds.  If you were in the market, the S&P was up 31%, the world was up 26.7%.  You basically had to bet against the market to lose money last year.

It’s not as if we had fantastic news or some other catalyst to push the (stock) market higher.  Earnings growth was more than likely negative, trade war with China, impeachment, manufacturing contraction, European recession fears, Brexit, middle east turmoil……. where was the positive news?  We did get some help from our Fed by lowered interest rates, so that was helpful, but the fed usually does that when the economy is doing poorly.  We aren’t - record low unemployment, wage growth, consumer sentiment.  We are more than likely in a manufacturing recession, but that Is around 13% of our economy.  The consumer is 70% and they are killing it!

We invest based on investor behavior.  If you’ve heard me speak, we put a lot of work into whether we are being greedy or being fearful.  We follow momentum very carefully to see where people are getting greedy and what the consensus is doing.  Looking back to 2018, we had a rather large correction in the 4th qtr.  So, looking at momentum, the money was flowing into safer investments.  Actually, even into the end of August, lower volatility investing was leading the market by a 20% to 15% margin.  The market was very bullish price wise, but low vol was higher, 20-year government bonds were up almost 22%, gold was up almost 19%.  This doesn’t happen when stocks are on fire.  We are definitely having a multiple personality disorder here.  If I am feeling good about the market, I want to be in momentum.  But momentum was low volatility, it was my risk off trade.  That’s what was working.  It wasn’t until the 4th qtr that the two started to deviate in returns.  In fact, if you look at our portfolio today, it looks like we are taking much less risk than we are because of the whole greed = fear investing.

Considering the kind of year we had in 2019, what can we expect for 2020?  We might have collected all of our return in 19.  Earning growth is supposed to be mid-single digits.  Stock buybacks will continue to roll along with the interest rates we have today.  That’s all great!  The problem is that the market is pretty pricey.  The P/E was 18.94 in Q4 and has currently climbed to 22.4.  That’s a growth of 18.27% just coming from PE expansion.  We can have stock appreciation from 3 things:  Dividends, PE expansion/contraction and earnings.  We should have earnings growth and dividends in 2020, but probably not a whole lot of PE expansion.  Earnings are expected to increase 9.6% in 2020 with a dividend of almost 2%.  If expectations turn out to be correct, we are in for another great year.  So, this might be the case of everyone getting in the market in 2019 in anticipation of the 2020 growth.  The current, cute little internet acronym is FOMO - Fear of Missing Out.