Winter 2020

Quarterly Commentary

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A New Year brings both new challenges & opportunities. Following a strong 2019 will be difficult. Last year, $6.2 trillion in new shareholder wealth was created by the stock market. That’s a lot of stimulus for our consumption-driven economy!

The positives flowing through our economy as a result of this ‘wealth effect’ created by stocks cannot be overstated. When combined with the low interest rate environment, our economic outlook is favorable for 2020.

Businesses and investment are a bit of a wild card. Many have held off on capital expenditures – especially going into an election year. However, as we progress through the year, we should get more clarity on a potential election outcome and businesses will respond accordingly. Stocks will need to produce strong earnings to validate 2019’s stellar returns. We remain cautiously optimistic.

Economy Positives

USMCA passes!
In a rare instance of compromise coming out of DC, the U.S. Mexico Canada Agreement (a.k.a. the NAFTA 2.0 trade agreement) was recently passed by the House of Representatives. The Senate is expected to pass it early in the New Year. Some economists expect GDP to increase +0.3% as a result.

Thank goodness for Services!
The ISM Non-Manufacturing Index, a good barometer of the overall health of the consumer and our service-driven economy, posted a 55 reading in December up from 53.9 a month prior. Importantly, business activity surged to 57.2 – up 5.6 points!

European Green Shoots!
Economies outside the U.S. are beginning to recover. The U.K. and German economies have been experiencing stronger data, or green shoots, for over a quarter now. As a result, their government bond yield curves have steepened which suggest economic expansion in the near-term.

Economy Negatives

Another caution flag from Manufacturing!
The December ISM Manufacturing Index reading of 47.2 was awful. In fact, it was the lowest print in over a decade (June 2009)! Thankfully, manufacturing only represents a low-teens percentage of our overall economy and recent trade negotiations with China are improving!

The Kick-the-Can Debt Problem.
Our leaders in Washington D.C. need to exercise some fiscal restraint. Total federal debt recently hit $23 trillion and continues to rise daily. This has a dampening effect on economic growth over time. Unfortunately, politicians continue to look the other way.

CapEx on Hold?
Election year uncertainty can negatively impact corporate capital expenditures. Recent uninspiring data trends in capex suggest we should expect more of the same. According to Renaissance Macro Research, capex intentions are ‘better, still not close to good.’

Financial Market Negatives

The Middle East Hornets’ Nest!
Iran is now a big problem for the market. Tough talk and rhetoric have been replaced by drone strikes and ballistic missiles. We are hopeful that cooler heads will prevail but the increasing intensity of this conflict has market participants worried and could lead to a pullback.

Will 2019-20 be a repeat of 2017-18?
If recent history is any guide, strong market return years (2017: S&P 500 up +21.14%) can often ‘pull forward’ returns from future years (2018: S&P 500 down -4.75%). Will history repeat after 2019’s +33.07? History suggests that election years can produce mid-single digit returns.

Does the Fed know something we don’t?
Hidden beneath the surface of the recent rally in stocks, the Fed has been quietly increasing its balance sheet since last September. Its support of banks and the ‘repo markets’ have added liquidity to the system & helped buoy markets. We’d like this temporary support to end!

Financial Market Positives

Earnings estimates are back on the rise!
According to Refinitiv, corporate earnings are expected to recover this year to +9.6% up from -0.2% in 2019. Although markets typically do not like a seesaw pattern (EPS were up +22.7% in 2019) in fundamentals, a mid to high-single digit rise should sustain the markets.

Dry powder is plentiful!
Investors currently hold over $3 trillion in cash in their investment portfolios. Therefore, we anticipate market pullbacks will be consistently bought by investors and remain supportive to the market. The sustainability of any advance will be heavily dependent on company earnings.

The lower-for-longer market.
The level of and trend in interest rates are vitally important to equity investors. The significant decline in rates throughout 2019 was a key contributing factor to the strong market rally. If rates (and inflation) stay lower-for-longer, the market can trade at higher-than-average levels.