4Q19 Insights

January 10, 2020 - 4 minutes read

What a difference a year makes.

One year ago, we were reeling from a 20% stock market correction from the highs of early October of 2018 to the very late part of December. This put the S&P 500 in a loss position of 4.4% for the full year. The Federal Reserve raised short-term rates four times over the course of 2018 and the economic indicators were signaling that our economy may not have the near-term growth outlook originally projected.

Today we have the good fortune to look back at a year that saw the Standard & Poor’s 500 rise 31.5%, domestic mid-cap and small-cap stocks gain 26.2% and 25.5%, respectfully, and stocks outside of the U.S. (as measured by the MSCI All-Cap World Index) gain 26.6%. But, wait, there’s more! Shorter-term bond indices (our sandbox) were up 4.6% while the other asset classes that we focus on; including MLP’s (+5.7%), Real Estate Investment Trusts (+23.1%), and preferred stocks (+10.7%) had very nice years as well. Even our “insurance policy”, Gold, rose 17.9% in 2019. In truth, 2019 was a very unusual year with so many asset categories doing so well. We are pleased (actually, thrilled) that we have been largely fully invested over the course of 2019 and taken good advantage of this strength.

The next question, of course, is, “What about 2020?” Will we see an encore of 2019, will we give back some or all of the recent gains of 2019, and what might outperform or underperform in the year ahead?

To start with, we readily acknowledge that there is no shortage of worries today. Shorter-term worries include the lingering inability to reach a trade agreement with China, potential Brexit fallout, a flat yield curve, earnings expectations that fall short of consensus forecasts, impeachment proceedings against President Trump, escalation of Hong Kong protests, a misstep by the Federal Reserve, and uncertainty in the Middle East and our place in this region. Later this year, we have an election here in the U.S. (almost always a worry). Longer-term worries from our perspective are a decline in globalization, continuing budget deficits, the end of the era of cheap money, and inflation.

With this knowledge, we can say that today not much has changed in terms of our asset allocations. We believe that stocks are still the best vehicle to grow assets over and above inflation, hence, we do not have a lot of cash in our equity strategies. We have reduced the risk profile of the stocks we do own and, in our Core Equity Strategy, have shied away from making any sector bets. We also gravitated to a value bias during 2019 (a little too early, in hindsight). We are trying to be very mindful of price targets on our stocks and not get too greedy if an issue gets too far above target. Our bond strategies remain focused on maturities of five years and under and we are not getting carried away with lower quality bonds particularly as investors are not getting enough premium these days to take a lot of credit risk.

With so many variables out there in the economic and political world today, it is easy to have knee-jerk reactions in managing portfolios. We are pleased that we have kept our eye on the long-term and have not been influenced by short-term events. We will continue to view our job as managers of your assets as one that requires a level head and a search for reasonable value.


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