Here are the charts and themes that tell the story of 2019…
I. From Humble Beginnings
“Bear Market. Inverted Yield Curve. Trade War. Government Shutdown. Recession.”
These were just a few of the ominous buzzwords heard at the start of 2019.
The S&P 500 had just suffered its worst December since the Great Depression (-9%) with its peak-to-trough decline exceeding 20%.
This combined with an inverted yield curve, ongoing trade war, and government shutdown painted a bleak picture of the future.
If that weren’t enough, on January 3, bellwether Apple shocked the world when it dropped nearly 10% after issuing its first profit warning in 16 years.
The 39% correction in Apple was its largest since 2012-13.
The broad market took notice, with the Dow falling over 600 points as “fears of an economic slowdown” were on the rise.
In a twitter poll I ran that very day, 45% of respondents said the next recession would begin in 2019. In the replies, many argued that it had “already begun.”
All hope for a good year in the markets was lost, or so it seemed.
II. Call It a Comeback
And then, without any warning, fanfare or news, something strange happened.
The market started to go up.
By the end of April, the S&P 500 was back at an all-time high, advancing over 25% from its late December low. It was the best start to a year for U.S. equity markets in decades.
As a result, the 2018 bear market became one of the shortest ever, lasting just 3 months.
It would also become the 10th bear market with no recession, proving once again that the stock market is not always a reflection of the economy. Sometimes a bear is just a bear.
But what about that whole government shutdown thing?
Well, it ended up being the longest ever (35 days), and also the most bullish, with stocks advancing over 10%.
III. Every Rose Has Its Thorn
While the path back to new highs was swift and uneventful, 2019 was not devoid of the typical market drama.
As the great poet Rocky Balboa once said, “the world ain’t all sunshine and rainbows.” The same can be said for markets.
Even in the strongest of uptrends, there are bumps along the road.
The largest of these bumps would occur from the start of May to early June, when the S&P 500 fell 7.6%. Here’s one headline from the day of the correction low.
Another brief correction would occur from late July to early August (-6.8%), with the “trade war” bogeyman rearing its ugly head once more.
Right on cue, CNBC did a “markets in turmoil special,” and right on cue, the market would rally into year-end, never looking back.
The July-August correction was the 25th since the March 2009 low. They all seemed like the end of world at the time. And they were all soon followed by new all-time highs.
Volatility and corrections are the price of admission for long-term investors, without which there would be no reward.
The rest of the Balboa speech from above rings true here…
“It ain’t about how hard you hit. It’s about how hard you can get it and keep moving forward. How much you can take and keep moving forward. That’s how winning is done!”
Being good at suffering is a superpower in investing. How much can you take and keep moving forward?
IV. Easing Like Sunday Morning
When it comes to central banks, there is little tolerance for pain and suffering anymore.
Long gone are the days of Paul Volcker (RIP) when the Fed hiked rates over a weekend in October 1979 from 11% to 12% (known as the “Saturday Night Special”). They would eventually take rates all the way up to 20% to “break the back of inflation” and end the period of stagnation that had plagued the 1970s.
In 2019, with the stock market at record highs, unemployment at its lowest level in decades, and the economy continuing to expand, the Fed decided it was a good time to start cutting rates again.
In doing so, they threw fuel on a global bonfire of easy money.
From Chile to China, interest rates were slashed around the world.
Historically, the Fed had never cut rates with the unemployment rate below 4%. In 2019, they did so 3 times, with the final cut coming with stocks at an all-time high and the unemployment rate at a 50-year low (3.5%).
These cuts pushed the real Fed Funds Rate (Fed Funds minus core inflation) well into negative territory.
But the Fed didn’t stop there. They put an abrupt end to the balance sheet reduction plan and reversed course 180 degrees.
In the last 4 months of the year, they would expand their balance sheet by over $400 billion. If that breakneck pace continues in 2020, the Fed’s assets will hit new record highs by April.
The message from central banks today is clear.
Easy money is no longer a tool reserved for recessions and crises. It is now the default policy in any environment given the view that there are only positive (stimulus, wealth effect) and no negative (if higher inflation (asset price or otherwise) comes, that’s good) consequences to easing.
V. Going Where No Yield Has Gone Before
In August, we saw the full effect of this thinking, with 19 countries around the world sporting negative yields.
The entire yield curve in Switzerland had gone negative, with “investors” buying 50-year bonds at an interest rate of -0.45%.
Perhaps unsurprisingly against this bizarro-world backdrop of paying to lend money, there was a resurgence of interest in Gold. The yellow metal had its best year since 2010 (+19%) and reached levels not seen since 2013.
Meanwhile, with the Fed cutting rates and interest rates globally hitting new record lows, U.S. yields of all durations were falling fast.
The 30-year Treasury yield dropped below 2% for the first time, hitting an all-time closing low of 1.94% on August 28. Just a year earlier, it stood at 3.03%.
Mortgage rates fell in tandem, with the 30-year fixed coming within 18 basis points of its record low.
This would spur a sharp rebound in housing activity, with New Home Sales hitting their highest levels since 2007 and the Housing Market Index (measure of homebuilder sentiment) hitting a 20-year high.
The entire U.S. yield curve had inverted by August, with the 1-month Treasury yield (2.1%) higher than the 30-year yield (1.96%).
The widely followed 10-year/2-year inversion occurred briefly as well. While this was reported to be an imminently bearish signal, during the three prior instances (Dec 05, May 98, Dec 88) there was a long lag before stocks and economy would peak.
In any case, the inversion did not last very long, with the Fed’s 2nd and 3rd rate cuts driving the short end lower. At the same time, longer-term yields drifted higher as fears of a global slowdown subsided.
By year end, the spread between 30-year (2.39%) and 1-month (1.48%) yields stood at 0.91%, a significant increase from a few months prior.
VI. Politics and Portfolios
Another thing that was increasing were the odds of impeachment.
Some suggested this would be bad news for the stock market…
What actually happened?
The S&P 500 rose over 8% from the start of the impeachment inquiry on September 24 until the impeachment vote on December 18.
Investors would learn once again that mixing politics with your portfolio is never a good idea, something to keep in mind heading into 2020.
VII. Tilray, Tesla, and Tall Tales
What is a good idea is learning to avoid the FOMO that accompanies all manias.
In 2018, we saw one the greatest bubbles of all-time time in a marijuana stock called Tilray (TLRY).
At its peak it had advanced over 1,600% from its IPO only two months earlier and its market cap ($28 billion) had surpassed 50% of the companies in the S&P 500.
In 2019, we saw the other side of this mania, with Tilray losing all of those gains and more.
The Tilray of 2019 would have to be Beyond Meat (BYND). In less than 3 months it rose to 859% above its IPO price. From there, it would decline over 70%.
The opposite scenario played out in the most controversial stock in the market: Tesla (TSLA).
It was cut in half by early June only to rally 146% by the end of December, surpassing the now infamous “funding secured” level of $420.
In terms of sectors, the biggest story of 2019 was in semiconductors. The tall tale spun by the pundits: semis would have a “hangover year” in 2019 due to “weaker end-demand trends, inventory adjustments, and China trade issues.”
What actually occurred?
A veritable boom in semiconductor stocks, leading all industry groups.
The PHLX Semiconductor ETF (SOXX) gained over 62% in 2019 and the top 3 performers in the S&P 500 were all Semis (AMD: +148%, LRCX: +119%, KLAC: +104%).
VIII. Expect the Unexpected
While semis were enjoying spectacular gains, we saw one of the largest crashes in history occur in Argentina with the MerVal Index falling 37% in a single trading day.
In US Dollar terms, the loss of 48% was the second largest in history. This was a 20+-sigma event which means that it should not have happened even once in the history of the universe (assuming a normal distribution which markets do not follow). But it did, and given enough time, it will happen again.
Could anyone have predicted the exact timing or magnitude of such an extreme day? No.
The best we can do as investors is to understand and accept the fact that fat tails are an inherent part of the game. We must learn to expect the unexpected and be prepared for multiple outcomes, with diversification serving as our best defense.
IX. Triumph of the Optimists
Speaking of unexpected outcomes, we left 2019 in the exact opposite way that we entered it…
The recession predicted by many never occurred. Instead, the expansion would go on to become the longest in history at 126 months and counting. The 2010s were the first decade without a recession.
At 3.5%, the unemployment rate fell to its lowest level since 1969. It started the decade at 9.9%.
Jobs in the U.S. have now grown for a record 110 months, exceeding the prior record by over 5 years.
The trade war?
It ended up being the gift that kept on giving. Each time there was any rumor of “progress,” stocks would surge higher. The S&P 500 would finish the year up 31.5% (total return), hitting 35 new all-time highs along the way.
In the past 20 years, only 2013 (+32.4%) had a higher total return than this year.
The rising tide would lift all boats, with every major asset class finishing positive (the inverse of 2018).
The 100 largest ETFs were all up on the year with U.S. technology shares (XLK) leading the way (+50%).
This was the best year for U.S. tech stocks since 2009. All 11 U.S. sectors finished higher on the year, with 10 out of 11 gaining more than 20%.
The broader Nasdaq 100 Index extended its streak of annual gains to 11, a new record.
No company contributed more to these gains than Apple (AAPL), whose stock more than doubled from its low on January 3. The “profit warning” fears that started the year were non-existent by year-end. Apple remains the most profitable company in the world.
Apple would regain its title as the largest company in the U.S., with its market cap surpassing $1.3 trillion.
Most country ETFs finished positive (avg return: +16%) in 2019, with U.S. shares outperforming once again.
By December, equity indices were hitting all-time highs in unison on a daily basis. The band was back together.
Not to be outdone, the U.S. bond market had its best year since 2002 with a return of 8.7%.
All segments of the fixed income space would finish higher on the year, benefiting from the global decline in interest rates and tightening of credit spreads.
The combination of the strong stock and bond returns led to the highest return for a U.S. 60/40 portfolio since 1997: +22.4%.
Home prices in the U.S. continued to hit new record highs, with lower mortgage rates providing a much-needed boost to affordability.
Commodities also fared well, with Palladium and Crude Oil leading the way higher. It was the best year for the broad CRB Commodity Index since 2010.
In the world of crypto-currencies, it was another wild ride, but higher in the end with Bitcoin finishing up over 92%.
The TL;DR recap of 2019…
- Economy: growing
- Stocks: higher
- Bonds: higher
- Housing prices: higher
- Commodities: higher
- Bitcoin: higher
- Central Banks: easy
A triumph of the optimists once more.
X. Happy New Year
These were the charts and themes that told the story of 2019. As always, the narratives followed prices.
As prices change in 2020, the narratives will change as well.
- Where will the S&P 500 end 2020?
- How about the 10-Year Yield?
- Where is Crude Oil headed?
- Is Gold a good investment here?
- How many more times will the Fed cut rates?
- How will the trade war ever end?
- Is a recession coming?
I don’t know the answer to any of these questions.
As Lao Tzu said, “those who have knowledge don’t predict. Those who do predict don’t have knowledge.”
What’s the alternative?
Weigh the evidence as it comes, invest based on probabilities, be forever humble and thankful, and leave the predictions to those whose job it is to entertain. That’s the best you can do in this fickle business of investing – try to find the right path for you and stick with it long enough to reap the enormous benefits of compounding.
In 2020, I predict one thing and one thing only: you will see many more surprises. That is the nature of markets.
I wish you all a happy, healthy, prosperous and fulfilling 2020.
If we can help guide you on your path, reach out. Everyone has a unique story to tell, and our job as advisors is to understand that story and build a portfolio and a plan that will enhance it.
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