December 2019 Market Commentary

And that’s a wrap on the second decade of the 2000s, and welcome to the “roaring 20s!”  Year-end is a great time to review the good, the bad, and where you want to go into the future.  We like to work on our balance sheets at this time of year, both personal and professional.  We have found that net worth statements tend to improve when they are consistently updated and reviewed, so if you decide to do this, we would love to hear how it goes for you!
 
In our review of 2019, we believe there were three phases which were all very different.  First, we had the rebound off of one of the worst quarters of the S&P 5001 in recent history.  Q4 2018 was down nearly 20%, and took most investors by surprise, especially when December usually has high odds favoring a positive month in the market (Fast Track data).  Most of the first third of 2019 was spent recovering what was lost the previous year.  The middle section of 2019 was a choppy mess, including a handful of swift drops of approximately 5-6%.  Finally, in the last couple of months, we believe the market got back its footing and is starting to move positively again. 
 
Last month in our market commentary, we observed that some of the factors behind this recent move up looked weak.  And to us, that never really changed.  But the factors did slightly improve as the “melt-up” continued.  Right now, there appears to be positive momentum in a majority of market sectors (whereas there were only half last month).  On the NYSE, new lows dropped to single digits and overall breadth did improve enough to justify the continued move upwards.  (Stockcharts.com Data).
 
To us, for now, the market seems fairly positive going into the beginning of next year.  In the short term, some areas we’re looking at appear to be “overbought” which could cause a pause or a slight pullback in the market over the next few weeks.  But at this point, it seems to be a healthy indication of a rising market going into 2020.
 
Let’s not forget that we did get the Yield Curve Inversion in August (read about its relevance here) that tends to signal a coming recession.  Longer-term, that recession hurdle is still out ahead of us, so in the coming year, we’ll be focused on protection when the time comes.  We still believe a recession is not if, but when. 
 
This month’s chart shows the three phases of the market I mentioned above.  Hopefully, this gives a better visual of what I was describing.  The box in the center shows the “choppy mess” section (August was especially cruel).  Also, interesting to note is that, given the drop of Q4 2018, real returns from 2019 have happened since October.

Eighteen Month chart of the SPY (S&P 500 ETF)2

The Bond market has been oddly strong this year, but since Q4 started, it seems to have hit a wall and has been trading sideways – making only slight gains, if any.  Even so, 2019 was a good year for bonds in general.  The Federal Reserve’s actions, including lowering interest rates, appear to have been a catalyst for more upward movement.  Of course, that was bad for savings accounts and money market funds, whose yields fell as rates rose.  So, I guess you can’t have it all.  What’s good for some areas isn’t good for others.
 
Our core bond model is having a good year.  We estimate our “Income” strategy had no negative months in 2019, while the Aggregate Bond Index AGG had 4 negative months (Fast track data).  Our goal in this model is to focus on consistency and low stress, so we’re happy to see it achieve its goal.  We’ll look for more of that in the months ahead…
 
Wishing everyone a Happy New Year and a prosperous 2020!

 

 

 

1 The Standard and Poor’s 500 is an unmanaged, capitalization-weighted benchmark that tracks broad-based changes in the U.S. stock market. This index of 500 common stocks is comprised of 400 industrial, 20 transportation, 40 utility, and 40 financial companies representing major U.S. industry sectors. The index is calculated on a total return basis with dividends reinvested and is not available for direct investment.
 
2 Charts are for informational purposes only and are not intended to be a projection or prediction of current or future performance of any specific product. All financial products have an element of risk and may experience loss. Past performance is not indicative of future results.