Happy New Year! We all look forward to the opportunities a new year might bring to our lives. We at Atlas hope that your year is filled with good health and happiness.
At this time of year, I find it satisfying to take account of the year past. I enjoy reflecting on goals achieved and plans that changed, expectations fulfilled and those that failed to turn out. Surprises – yes, there are always surprises. Markets sometimes surprise me too.
And what a nice surprise last year turned out to be.
As we entered 2019, we were in the midst of a stock market correction and significant uncertainty in the bond market. In fact, from its all-time high in mid-September of 2018, the S&P 500 sold off over 18% by mid-December. A number of classes of bonds were suffering losses in that same period.
As mentioned in my update at the time, some investors were distressed, thinking that the shakiness of the markets signified the early signs of another financial crisis. In that update, I laid out our case that the economy and corporate earnings remained strong, and that the market activity at the time seemed disconnected from the fundamentals. Some investors decided to reduce their equity holdings to minimal levels. By April, stocks had recovered those losses and had advanced past the previous record highs. Investors who had sold their stocks in the correction weren’t able to participate in the recovery. It was proved again that it rarely pays to let fear dictate one’s investment decisions, and sell out of the market because of a correction.
For the 2019 calendar year, both stock and bond markets posted rather impressive numbers. The S&P 500 returned over 30%. Not to rain on the parade, but the year started with the S&P at a relatively low starting point due to the correction described above (in fact, the return from 10/31/19 through 12/31/2019 is a more modest 12.36%.) After the recovery early in the year, the S&P 500 went through a period of volatility and returned just about nothing from April through September. Thankfully, the year ended the year with a strong rally. The fourth quarter saw the S&P 500 up just about 8.50%.
As for bonds, returns were similarly gratifying. The Barclay’s Aggregate Bond Market Index was up 8.72% for the year. In bond circles, that’s a rather impressive return. But again, late 2018 saw volatility, and bond prices dropped for some time, so the index started 2019 from a low point. Concerns at the time revolved around the direction of the economy rates and credit quality. The doomsayers felt that the economy was headed toward difficult times and that bond defaults would rise. But, again, the markets were disconnected from the economic realities of the time, and recovery in bonds followed. As the year progressed and the Federal Reserve Board reverted to a cycle of rate cuts, bond prices rallied through the summer months.
So as usual, the question at this point is “where do we go from here?”
Looking at this year, we expect to see interest rates remain low as the Fed stays quiet, economic growth remains in the 2.0% range, and inflation remains modest (though we do see some possible inflationary impulses late in the year.)
While we expect that stocks will continue to be attractive, we do believe we will see a return of interim volatility, and that the likelihood of a correction of 10% or more in the equity markets is heightened. However, with a return to earnings growth for S&P 500 companies, we have the opportunity to see a return of 7-10% on that index. International stocks look relatively interesting to us, but active management, smart stock picking and sector selection will be important in this area.
Lastly, while we do not foresee a recession in 2020, we do think that there is a possibility that what we could see is a continuation of the sector-specific recessions we’ve seen over the last few years, in the energy sector for example. With that in mind, we again think that an insightful sector strategy through active management could add value as compared with passive investing.
As always, if you have any questions or concerns, please feel free to contact your Atlas Wealth Management Advisor to discuss your specific situation with you.