Market Commentary - February 2020

The S&P 500 once again led the pack in 2019 with a 31.49% total return, the second highest since 1998 and tied for the 7th best since 1960. Nearly every equity asset class experienced double digit gains, along with every sector. A majority of bonds witnessed their best year in nearly a decade, specifically corporates, which had their second best year since 1996. Even commodities, which had been in a prolonged slump, witnessed its second best year since 2011.

As we work our way into 2020, there are a few things to keep an eye on: 

  1. Stock Buybacks: The S&P 500 witnessed buybacks of $748 billion in 2018 & ~$670 billion in 2019. The estimate for 2020 is ~$570 billion. While still a large amount, corporations need to start showing more signs of organic growth as opposed to stock buybacks to support their high valuations.

  2. Apple & Microsoft: These two stocks were responsible for ~50% of the S&P 500's gains in 2019. Their weight in the S&P 500 is now at 9.4% and a repeat performance is a tall order so unless the others pick up the slack, total returns in 2020 could be impacted.

  3. Earnings: To support higher stock valuations, earnings must start increasing. The Federal Reserve’s interest rate cuts in 2019 allowed investors to take their eyes off earnings in the short term. Corporations and analysts have been revising earnings forecasts lower which is worrisome as that would suggest that stock prices are potentially inflated.

  4. Trade War: I know people are tired of hearing about this but 16 months has passed and not much has been finalized. The signing of phase 1 was a start but more concrete measures need to be finalized as further delays will continue to dampen economic growth which could bring back the recession talks.

  5. Elections: The 2020 election will be one of the most anticipated elections in history. Markets tend to experience higher levels of volatility leading up to an election but it is important to note that the S&P 500 has only dropped in 4 of the 23 presidential election years going back to 1928. So while volatility may spike, the annual returns tend to not be impacted. 

Wild Card: As I am writing this the markets are tumbling due to the virus outbreak in China. This is a good example of things you can't plan on.

The items above can be cause for concern, but not panic. There are always things to worry over and while we can’t predict the future, investors should not expect a repeat performance of 2019, especially the muted levels of volatility.  The positive news is global economic data doesn’t seem to be as weak as many feared it would be by now. The next several quarters will help shed light on how much progress has actually been made.

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