What a difference a year makes! At Christmastime a year ago, financial markets were in steep decline and fear was all around. The Fed had stubbornly been raising interest rates and the foreboding inversion of the yield curve was the topic of the day. Yet, after just one quick trip around the sun, financial markets in 2019 turned out to be simply marvelous.
If things stay steady for the final week, the stock market will be up about 25% to 30% for the year. This more than makes up for last year’s moderately negative year. The results rival the fantastic returns of 2017 and 2013; the best years of this current bull market. And, this year even stands toe-to-toe with the recession-recovery years of 2009 and 2003. It was a surprisingly good year.
As we all know, it’s not like things have been all peaches and cream lately. In the face of a slowing economy, the Federal Reserve suddenly reversed course and cut interest rates. The trade war with China was being waged basically all year long. Our largest companies delivered almost zero earnings growth. And, finally, we ended the year with an impeachment vote. With all of this, I don’t think many investors would have predicted such a strong market.
What made 2019 more marvelous was the big return in bonds. For the year, bonds delivered about 6% to 12%. Ironically, the driver that led to the great year in stocks was the same factor that drove up bonds; the Fed’s interest rate cuts in response to the fear of a possible recession. It’s not very often that worry of a recession produces both a rip-roaring move in stocks and bonds. But, it happened!
Politics aside, my current take on the state of the economy is it’s holding its own. The dangerous trade war has now morphed into a trade truce. And, the Fed has signaled that it is standing at the ready on the sidelines as it watches how things will unfold. Perhaps most importantly, the past concerns of an impending recession have all but disappeared.
You might be wondering, how did an investment adviser, like me, manage through a year like 2019 and what’s the game plan for 2020? As markets rose considerably throughout the year, I took two steps to lighten up on stocks and lower overall risk. My latest risk adjustment was done in August. The result is a larger-than-normal current allocation to short-term, safer investments. However, this type of conservative positioning can never be viewed as an endpoint.
After 20 years in the investment business, I’ve come to recognize that the tool that’s needed most to be successful is not a crystal ball. Rather, I rely most on an old-fashioned scale; working to weigh current risk against future reward. With many of the past clouds seemingly parting, I have some work to do in 2020. And, for that, I am thankful.
Jason P. Tank, CFA is both the owner of Front Street Wealth Management, a purely fee-only advisory firm and the founder of the Money Series, a non-profit program committed to providing open-access to financial education, for all. Contact him at (231) 947-3775, by email at Jason@FrontStreet.com and at www.FrontStreet.com