Your 2019 Market Commentary
The start of the year is a common time for reflection, and last year was an amazing year in the markets. Despite geopolitical headwinds, the U.S. stock market reached all-time highs and all major asset classes around the globe ended the year in positive territory.
As you settle into the new year, let’s recap some major highlights from last year along with some potential developments to monitor.
Geopolitical headlines moved the markets throughout the year, and it appeared as soon as one challenge was addressed another was exposed.
All Eyes on China
The ongoing trade war with China captured headlines throughout the year, going back and forth between progress and setbacks. After a year of threats, tariffs, and negotiations tensions between the two superpowers ended the year lower.
The two sides expect to sign “phase one” of a trade deal in mid-January, and additional negotiations are scheduled to expand beyond “phase one.” Keep an eye on the planned signing in January and future negotiations as this has been a campaign talking point in an election year.
Politics as Usual
For only the third time in our nation’s history, the House of Representatives impeached the president. But markets took the news in stride as few experts expect the Senate to convict him. Throughout the year, we also monitored the progress of major legislation such as the SECURE ACT and USMCA.
Just as 2019 was winding down, the SECURE ACT passed as part of a broader budget deal and the House approved the USMCA . Keep an eye on what matters. In an election year there will be constant headlines and promises from campaigns, but it is important not to overreact to headlines throughout the year and stay focused on the long-term.
Brexit, Brexit, Brexit
The initial referendum was held over three years ago, with 52% of voters opting to leave the European Union. Brexit was supposed to occur in early 2019 but has been delayed several times amid constant uncertainty.
After a revised deal did not pass Parliament, Prime Minister Johnson called for an early election in December and returned to power with a healthy majority in hopes to make a deal easier to pass. Keep an eye on how this impacts a Brexit deal early in 2020 as parties look to avoid a no-deal Brexit which might cause disruptions.
Trouble in the Middle-East
The tension between the U.S. and Iran was in the news throughout the year after Iranian attacks (directly or through suspected proxies) on oil tankers, drones, oil infrastructure, and the U.S. Embassy in Iraq.
Tensions escalated further in 2020 after General Qassem Soleimani was killed in a U.S. drone strike and Iran launched missiles at U.S. bases in Iraq. Keep an eye on future escalations. So far tensions have caused short-term fluctuations in stock and oil markets, but the financial ramifications of a broader conflict are unknown.
Focus on Fixed Income
Normally, the stock markets capture major headlines, but fixed income markets got their fair share of attention throughout the year.
The Fed Making Moves
In July, the Fed cut interest rates for the first time in more than a decade and cut rates two more times before the end of the year. Based on the statement by the Fed, the board will rely heavily on the data and many investors see this as a sign that they may pause rate cuts. The data is mixed but generally supports a bullish view of the economy.
On one hand, the labor market and consumer spending is strong, but inflation remains low and business spending is contracting. Keep an eye on future statements from the Fed, and how this impacts your overall financial picture—from investments to interest rates you pay on debt. With the current interest rate environment, it might be helpful to consider refinancing your debt.
An Inverted Yield Curve
Last year, an inverted yield curve received plenty of attention. The news referred to the yield on the 2-year Treasury being higher than the yield on the 10-year Treasury. Looking back, inversions have occurred before every recession since 1956. It is important to remember that past recessions started on average 15 months after the inversion occurred.
Some experts argue that this time is different, since a major factor driving yields lower is the fact that trillions of
dollars in bonds around the world have negative yields. When someone buys a negatively yielding bond, they are paying the issuer for the right to loan them money. With negative yields around the globe, U.S. Treasuries have attracted investors looking for yield and safety.
That is why some experts believe the yield curve inversion reflected the expectation by the market that the Fed would lower rates. As discussed above, the Fed did lower rates. Keep an eye on the big picture. Television shows, newspapers, and websites rely on people consuming their content.
Catchy and negative headlines get more people to watch and read. Rather than letting headlines cause panic and lead to rash decisions, it is important to have a long-term strategy and understand what is important. Stay informed but keep your eye on the prize over the long term.
Unfriendly Welcome for the New Kids on the Block
Heading into the year, investors were excited to invest in an anticipated crop of private companies that captured the public’s attention while disrupting traditional industries.
Overall, the IPO market, as measured by the Renaissance Capital IPO ETF, outperformed the S&P 500 Index but there were several notable bumps along the way that may influence future offerings and investments.
Much of the attention in the IPO market was on the “mega IPOs” such as Uber, Lyft, Pinterest, SmileDirectClub, and Peloton. It is safe to say that these companies have disappointed investors since going public as only Peloton ended the year in positive territory.
A disappointing start does not always mean impending doom for a company, but these companies faced challenges in the form of lawsuits, regulations, and reasonable paths to profitability.
Ironically, some of the companies that had the largest gains since their IPO were lesser known companies such as Beyond Meat, Karuna Therapeutics, and Palomar. Keep an eye on investing for the right reasons. Rather than following the “it names” or trendy picks, it is important to understand your long-term investment objectives. Conviction in the business models of the companies you invest in can go a long way.
IPOs That Never Were
Besides the companies that had a rocky entrance, there were also several companies that decided not to go public. WeWork was front and center after filing paperwork in August. After investors questioned the company’s leadership and economics, they delayed the IPO in the face of a drastic reduction in valuation.
Since that time, there have been leadership changes, a change in control, and layoffs. Additionally, Endeavor delayed its IPO twice last year and ultimately scrapped its IPO plans. Some viewed the chilly response to Peloton’s IPO and decreasing demand for shares as a sign that the current market environment is not the ideal time to go public.
Keep an eye on how the IPO market responds in 2020 as investors seem to shift from a “growth at all costs” mindset to focusing on profits.
The More You Know
It seems like every time you turn on the TV or visit a website there is “breaking news.” There are also catchy headlines calling for a market meltdown. Here are several of the countless examples of similar headlines in 2012 , 2014 , and 2015 .
Stock markets will experience volatility and there will eventually be another recession, but timing the market is a risky proposition. It tempts most investors at one point or another to try to time the market using logic.
The problem is that trying to time the market is a bad idea. Looking at the S&P 500 from the beginning of 1999 until the end of 2018 , the average annual return was 5.62%. If you missed the ten best days, your average annual return would have been 2.01%.* Just ten days over two decades.
Plus, keep in mind that six of the ten best days occurred within two weeks of the ten worst days. Rather than timing the market, focus on developing a long-term diversified investment strategy. Your future self will be grateful.
*Source: J.P. Morgan Asset Management analysis using data from Bloomberg. Rates are based on the S&P 500 Total Return Index, an unmanaged, capitalization-weighted index that measures the performance of 500 large capitalization domestic stocks representing all major industries. For more details on this stat, visit J.P Morgan’s Principles for Successful Long Term Investing
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