2019 was an unusual year in which both equities and fixed income performed quite well, thanks mostly to a reversal in the Fed’s monetary policy. Most forecasters expect that both will fare less well in 2020 and that modest gains are the best case scenario. Throughout the year, we remained focused on controlling risk in client portfolios. With over a decade of strong returns in equity markets, we fear that the lessons of 2008 may be fading from memory for many investors and that the tendency to chase returns at the expense of prudent diversified portfolio construction has once again become an issue.
Equity markets had a stellar year in 2019, but earnings growth has been weak or negative in most markets. Most of the performance has been driven by substantial loosening of monetary policy and an increase in valuations. The consensus view now seems to suggest that earnings will recover slowly in the coming year and that another rate cut, at least in the US, is unlikely.
Government bond yields fell significantly in 2019, with the 10-year US Treasury yield dipping very close to its all-time low in early September. With the expectation that the Fed will stay on pause while Europe and China ease further – and in the absence of a surge in inflation, yields will likely remain relatively stable.
With slightly more clarity around US – China trade negotiations and Brexit, capital markets seem to have shrugged off some of the concerns that drove volatility in the previous year. We advise against being lulled into complacency. The 2020 presidential election will be a key inflection point for US equities, given the major policy differences between the different candidates. The recent “phase one” deal between the US and China is unlikely to resolve the underlying tensions between the two countries, which could easily flare up again. The Middle East remains unstable and a disruption to the world’s oil supply could further slow global economic growth.
All this being said, we remind you that accurate forecasts are difficult, as discussed in the article “The January Effect” in our 2019 Annual Market Review. Have a plan that includes a balanced and diversified portfolio. Understand your risk tolerance and stick to the plan, even when it’s uncomfortable. Avoid chasing returns in the latest “hot” asset class. Your advisor is always here to help, so please feel free to contact us.
View our Q4 2019 Annual Market Review.
J. Brent Everett
Chief Investment Officer
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