2019 finished upbeat. Limited tax selling deferred gains forward into a 2021 payment, which helped markets grind higher through December. The key to performance came from earnings multiples advancing, up from 14x to more than 18x, with limited earnings increases. The price advance has either borrowed ahead or at a minimum put more pressure on advancing earnings for 2019. Improved sentiment followed, setting the stage for strong equity performance.
S&P500: December +2.86%, 2019 +28.88%
DOW: December +1.74%, 2019 +22.34%
NASDAQ: December +3.54%, 2019 +35.23%
Russell 2000: December +2.71%, 2019 +23.72%
Start of 2020
The picture for the new year is, generally, positive. A strong consumer….Supportive Fed policy….China trade policy headed for initial level of agreement….Little indication of recession….Signs of global economic improvement and finally, Brexit moving toward a resolution. The only new offsetting risk is the tussle with Iran, which is settling down.
Wall Street projects earnings in the +3%-5% area for 2020. The 10-Year U.S. Treasury will probably move in the 1.5%-2.5% yield range. We believe that should these numbers come to fruition, a market return of 5%-10% (including interest and dividends) is achievable in 2020.
The Fed’s pro-growth policy has reinforced market optimism. There is little inflation in view and interest rates remain low. Wage increases have been absorbed so far. The current fiscal policy of easy money from the Fed (producing liquidity), coupled with support from Technology, are unique factors to developing the 2020 economic upturn. The wild card is the election. News related to it will produce volatility and significant swings in equity prices.
Projections for the full year are subject to change as the year develops. 2019 forecasts were widely off the mark with lower earnings offset by increased market multiples. Market moves develop in stages.
Q1 will start with the payroll report. This will indicate the pace of the current economic picture. This is followed quickly by corporate earnings. Super Tuesday is up next, developing the political landscape and the possible emergence of the Democratic candidate.
Remember, Trump’s candidacy started off as a long shot and the eventual nomination and win were also. What a shift. This election has similar characteristics with the Democratic roster. It will require the same attention to portfolios and the requisite adjustments.
GN&Co is non-political. Our role, as stewards of our clients’ assets, is to optimally position their portfolios to protect principal and profit according to client ground rules.
Non-farm payroll numbers this week will shed light on how the economy is developing. The release of corporate earnings results begins shortly. Our sense is the market, short-term, is ahead of itself and that a 3%-5% pullback wouldn’t surprise. This would settle optimism and establish a baseline to further advance going forward. That’s our view at this early stage.
Our sense is that 2020 is wide open, starting out slowly and progressing. We are optimistic but do not expect a repeat of last year.
We are always on guard to protect assets.