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It has been a while since my last update, mainly because the main conditions mentioned in my previous update haven’t changed much, other than the year-long “recession obsession” finally subsiding…after recent economic reports relieved some pessimism and helped stock prices catch-up to current fundamentals.
Our 3100 year-end target for the S&P 500 Index was eclipsed in mid-November, and the S&P is now up approximately 25% year-to-date.
Foreign broad market stock indexes are up a little over 17% year-to-date, and even most bond indexes staged a recovery rally this year. Despite the strong year-to-date stock market performance, it has not been an easy year for investors. The trade uncertainties and subsequent global supply chain disruptions caused some economic slowing, as well as some unusual volatility in economic reports. The financial media and many pundits seemed to try to convince us that these were signs of imminent recession. They continually obsessed over the alternating couple of economic indicators that were weak that month, and practically ignored the majority of indicators that remained positive. For whatever reason or bias, any one-off statistic that looked like it could be a bad sign for the economy seemed to get front-page billing. This is the environment we find ourselves in today, so we remain extra diligent in where we source our data, and in verifying and corroborating all information and sources.
We understand what a confusing and unsettling time this is for investors still today. While financial fundamentals remain strong in the U.S., with continued healthy job and income growth, significant uncertainties persist. From the tariff situation, to geopolitical tensions and flare-ups, impeachment distractions, and significant uncertainty surrounding the candidates and outcome of the 2020 elections, there are plenty of things to worry about, but also to potentially be mislead by.
With markets reaching new all-time highs, very cautious optimism still best describes the market these days, with few seemingly willing to bet that things will improve. (A consistent trademark of this entire 10-year bull market.) The renewed investor caution this year reignited safe-haven demand for bonds, driving interest rates back down near record lows, and keeping stock valuations reasonable. Especially relative to bonds, cash and most other asset classes today in our opinion.
The Dow Jones Industrial Average could climb another 50% and still pay a higher yield than the benchmark 10-year Treasury bond today.
The U.S. and global economies did hit a slow patch mid-year (again, primarily from the trade related disruptions), while U.S. corporate earnings also experienced anticipated slowing in Q2 and Q3. We now expect economic growth and earnings to gradually reaccelerate in Q4 and into 2020. And while there are still plenty of global concerns, we are seeing more signs of stabilization and resumed growth in the global economy also.
We remain optimistic and bullish heading into 2020. We do not see signs of recession on the horizon at this point, even though the economic recovery is likely getting into its later stages. At least barring an unforeseen major economic shock, government policy missteps, or anti-business, anti-competitive or growth hindering policy changes from political leadership. In fact, we wouldn’t be surprised to see the U.S. and global economies pick up steam next year. Especially now that a USMCA trade agreement has been reached. And of course any positive resolution to the U.S./China trade negotiations would likely provide additional economic tailwinds.
We continue to watch many issues that could undermine the global economy and potentially pull the U.S. economy back down with it. Especially trade wars, disruptions from the negative interest rate policies of Europe and Japan and the global deflationary forces that are still prevalent (primarily from technology and the aging population demographics in developed countries). And of course the always present potential for accelerating geopolitical conflict.
With the December 15th deadline for the next round of announced tariff increases less than a week away, we may need to brace for increased market volatility potential near-term, depending on how or if the U.S./China trade negotiations progress.
Despite our continued cautious bullishness, after this recent strong run in the markets, this may be another good opportunity to raise a little extra cash for any potential needs next year, or even if you just found yourself feeling overly anxious during recent market corrections, or in reaction to recent news, politics, or doom and gloom media forecasts.
Remember, the media and financial industry have trained the masses to fear unpredictable near-term investor panics more than losing wealth over time. And, they tend to blur the distinction between saving and investing. We save for near-term needs and emergencies, accepting low returns in exchange for certainty and near-term liquidity. We invest to grow our wealth over time, which requires accepting and embracing inevitable short-term volatility in order to get returns that exceed the rate of inflation.
Of course market corrections are a given, and their timing is unpredictable. However, given the current backdrop, we once again anticipate that any market corrections in 2020 will likely be limited to single digit percentages.
As always, please call or email me with any questions, concerns or thoughts, or anything else I can be of assistance with.
Wishing you all a Merry Christmas and Happy Holiday Season!