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Market Commentary

2019 Year-End Market Commentary


Raise your hand if you thought the market would go up 31% in 2019.

It’s ok, no one else did, either.

A lot of the media and market “experts” thought the market would be negative last year. They also claimed a global recession was inevitable, along with contracting U.S. corporate earnings, and a Federal Reserve that would raise interest rates. Hard to believe so many credentialed, educated people could be wrong about so many things.

Going into 2019, AAFMAA Wealth Management & Trust (AWM&T) completely disregarded this noise and stuck to our research, experience, and sensibilities. For our stock portfolios, we added to semiconductor, homebuilder, and payment processing companies. For other portfolios, we added additional exposure to large-cap domestic growth and reduced allocation to international and small-cap domestic funds. These turned out to be advantageous moves that benefited our clients.

While we were surprised at the market’s dramatic upside move, it was almost inevitable that it would occur eventually, given the negative 2018 return. For an imperfect world, we are in an almost perfect environment for equities: low inflation, low-interest rates, an accommodating Federal Reserve, and an administration favorable to business. While multinational companies are better served by a weaker U.S. Dollar, we are still hard-pressed to remember a better time to invest in American companies.

Global market negativity reached its peak this past August when the S&P 500 index was down 6.2%, gold had risen to over $1,550 an ounce, the 10-year U.S. Treasury note yield declined to 1.43%, and the Swiss Franc appreciated 4% against the Dollar. Against this backdrop of negative worldwide sentiment, dismal long term overseas growth outlook, and continued positive U.S. growth (both relative and absolute), AWM&T seized the opportunity to make significant, strategic portfolio adjustments in late August.

International equity allocation was reduced by approximately 55%, with funds reinvested in a combination of large-cap U.S. growth and value equities. With the continued dominance of our economy the long term outlook favors increased investment in U.S. companies. Additionally, AWM&T reduced small-cap U.S. allocation by 33-45%, depending on the risk level. 

Although recent, the positive effects of this reallocation are already showing, and I’m optimistic that these recent adjustments will benefit our clients.

Looking Ahead

Despite the favorable market conditions I’ve mentioned, it seems that every week there is something new or different for markets – and expert commentators – to fret about. In addition to the usual worries (trade, geopolitical events, Federal Reserve), this is also an election year. There will be no shortage of opinions and speculation concerning winners and losers, legislative and regulatory changes and overhauls of healthcare and financial systems. This usually leads to emotional reactions that cause investors to make poor decisions. 

Instead, AWM&T will focus on:

Corporate earnings – after a raging 2018 that saw 20+% earnings growth, companies took a breath in 2019, only advancing 4%. We’re looking for a resumption to the 10-14% range, which should provide a positive lift for equities.

Federal Reserve activity – the Fed has done a much better job this year in communicating its accommodative message. They remain data-dependent, meaning they will not act rashly or politically, but allow the economic data to lead a well-thought conclusion. For the foreseeable future, the Fed has indicated a status quo with interest rates.

Unit Labor Costs – also known as average hourly wages, this measurement is one of the best leading indicators of future inflation. The current anomaly is that employment and job creation are at record levels, inflation is at a record low, and unit labor costs are only modestly increasing. Economists will be studying this period of history for decades to come, trying to figure out how there is low inflation with very low unemployment.

Growth versus Value – we believe that investors will continue to favor growth type companies in a positive economic climate. Our client portfolios have elements of both, however, in order to better balance risk and return. By the way, don’t buy into talk of a market trading at lofty valuations. At 18.6x current earnings, that is the average price to earnings multiple when inflation is at 2%.

U.S. versus the world, as it relates to stocks. With negative interest rates throughout much of the world, investment and savings capital continues to move to the U.S. This has been a drag on overseas companies, which often face heavy regulatory and tax burdens. With the U.S. continuing to lead in technology and healthcare innovation, more favorable investment opportunities remain domestic instead of international.

Interest rate direction – last year, a lot of discussion focused on the shape of the yield curve, which did not turn out to predict an impending recession. AWM&T is looking for a more normalized yield curve shape in 2020 as interest rates adjust to the more favorable economic environment. Distortions with overseas interest rates (negative rates), will prevent the curve from really bending upward. We anticipate remaining on the shorter end of the yield curve once again this year, as the risk-reward characteristics continue to keep us there.  

All of which leads me to the elephant in the room: the 2020 election. Most of the time, the market has positive returns regardless of which party is in office. Some past presidential and congressional matchups have been more profitable than others, but regardless of who is in office, the stock market still manages to chug along. That said, when an incumbent is reelected, markets perform dramatically better. I suspect that a known incumbent is less of a surprise than an unknown challenger, and the market hates uncertainty – of that you can be sure.

Total returns for 2019

S&P 500 31.48%
Russell 1000 Value 26.52%
Russell 2000 25.49%
Barclays Int. G/C Bond Index 6.80%

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Connect with your Relationship Manager

Every AWM&T client is assigned a Relationship Manager (RM), an experienced professional that can work with you on your investment positioning. While markets are in this range, take the time to meet with your RM to review your risk profile and any life changes that could impact your financial future. You’ll be glad you scheduled the appointment.