Market Data for year end 2019:
• S&P 500 Stock Index: 3231, up 28.9%
• Ten-year Treasury Note Yield: 1.92%, down 0.76%
• Gold: $1,523 per ounce, up 18.9%
• Oil: $61 per barrel, up 35.6%
Virtually every major investment asset class, from stocks and bonds to real estate and commodities, advanced strongly in 2019, as increased global central bank liquidity measures, and a seeming truce in the US-China trade war to end the year, provided a rising tide that lifted all boats. The strong gains were further enabled by the low starting point of December 31, 2018, a year where the converse was true: nearly all asset classes were depressed due to market fears of constricted liquidity and an escalation in trade hostilities. The stocks that performed the strongest in 2019 tended to be the ones that were hit the hardest in 2018, so our more defensive posture in stocks led to a moderate underperformance in stock portfolios in 2019 relative to a solid outperformance in 2018.
For the coming year, we expect further gains in stocks, although not nearly of the same magnitude of 2019 given that the market is beginning the year at all time highs, and not at the end of a major correction, as was the case for the year just passed. We are presented with moderate economic growth, low inflation, and accommodative central bank policy. This set of fundamental conditions has traditionally been an environment that is supportive of higher share prices, as witnessed by the previous decade.
As always, there are caveats to this benign forecast. We see two distinct risks that could send shares lower in the coming year: trade war reescalation and geopolitical risks.
The truce in the US-China trade war may not hold. The ongoing trade hostilities between the world’s two largest economies have created a high degree of uncertainty for the global industrial and technological supply chain, thus suppressing corporate investment. As mentioned above, a de-escalation of the trade war to close out the year was a major factor in driving 2019’s outsized gains. Both the Trump Administration and the Chinese government say they have arrived at a “Phase 1” deal that involves no further import tariffs and the modest rollback of some that were already on the books. The phase one deal does not cover any of the most contentious issues between the two economies, e.g. industrial subsidies and forced technology transfers, so arriving at a “phase two” deal will be more fraught. If the President feels frustrated that the Chinese are not negotiating in good faith, he may go back on the tariff war path, creating further uncertainty and sending stocks lower.
On geopolitical risks, America’s relationships with both Iran and North Korea have deteriorated over the course of 2019. On Iran, the US left the international nuclear deal with Iran in 2018 and unilaterally imposed crippling economic sanctions. Iran has felt the need to resist and in 2019 engaged in multiple aggressive actions, from seizing Western oil tankers to attacking a Saudi Arabian oil processing facility. In both cases, the Trump Administration did not respond in a forceful manner. Because of this, the Iranians believe they have the initiative and are likely to further seek to provoke the United States. While we strongly believe President Trump does not want a war in the Middle East while running for reelection, miscalculations on either side are always possible. A shooting war with Iran would likely send oil prices sharply higher and, consequently, share prices lower.
Concerning North Korea, the “bromance” between President Trump and the brutal North Korean dictator Kim Jong-un appears to have been put on ice. While having agreed to a nuclear weapons and ICBM test moratorium in exchange for the suspension of US-South Korea military drills, North Korea has continued to develop and expand its nuclear arsenal. Frustrated that the Trump Administration does not seem to be willing to offer further concessions at this time, particularly on economic sanctions against North Korea, Chairman Kim has said he no longer feels bound by any earlier agreements and has suggested a recommencement of weapons tests is imminent. This could anger the President and may lead to a further escalation in hostilities between the two sides. Once again, while we feel confidently that the President does not want a war during an election year, miscalculations are possible. A war on the Korean Peninsula would result in significantly lower share prices.
Given the above points, our attitude could best be described as cautious optimism. For 2020, we see the US stock market, as represented by the S&P 500 stock index to trade in a range of 3000 to 3600. It closed 2019 at 3231. We see interest rates moving modestly higher and expect gold to continue to advance on the back of a weaker US dollar, as a solid global economy in 2020 will likely lead to the relative strengthening of foreign currencies and commodities.
We appreciate the business you have given us. We thank you for the continued confidence you have placed in us. Please do not hesitate to contact us with any questions or concerns you may have. We wish you a very healthy and prosperous 2020.