2019 Market Recap and 2020 Outlook
2019 was a banner year for global markets. The U.S. stock market continued its dominant lead over international markets, large caps outperformed small caps, and growth outperformed value stocks. Coming off a rough Q4 in 2018 (when the S&P 500 was off approximately 20% from its recent highs), this was a much-enjoyed rally. The main drivers of the 2019 returns were:
- The Federal Reserve: They cut rates three times and reversed course on reducing their balance sheet, which actually went back to providing more liquidity to markets via “quantitative easing” (QE).
- Increased multiples: Investors were willing to pay more for earnings in 2019, as the multiple (P/E) increased from roughly 15 to 18 (approximately 20%). Year-over-year earnings by S&P 500 companies were actually flat. In our opinion, earnings will be a theme we closely watch in 2020, as we believe multiples are fairly to fully valued.
For 2020, we do not expect a repeat of 2019. However, we also do not foresee an imminent risk of recession, as the U.S. consumer (which accounts for roughly 68% of U.S. gross domestic product) is strong. Unemployment is at all-time lows and wage growth is on the rise.
We will continue to monitor the main drivers of performance we mentioned above — the Fed’s monetary policy, earnings and multiples. We believe monetary policy is running at almost full capacity, so we will need more stimulus from the fiscal side (i.e., government spending), which would not be uncommon in a presidential election year. Our expectation is that 2020 will be a reasonably good year, but volatility will return with geopolitical risks, more tariff talks and election cycle posturing.