Rational Investing During Uncertain Times
Schmolke Investment Team
2020 Annual Forecast
Another year has passed, and have you noticed how they seem to pass by quicker each year? In the meantime, the investment markets marched on but were somewhat deceiving during 2019. Although the markets pretty much followed the line we predicted, there was a lot of volatility. The last quarter of 2018 was down around 15% but 2019 was up substantially and performance was solid despite all the chatter.
If you’ve been around us for any time, you will know that we believe the investment markets are hardly predictable but there are indicators that help us monitor the viability of the overall markets. To have hindsight over the past 10-years would be an amazing “superpower”, but we take an analytical approach and study the indicators and economic trends. We’ve learned over the past 35 plus years that investing is a continuous process, there is no off-season like in sports. Watching the economic trends and many market indicators helps us better manage our client’s wealth and it is a 24/7 job that we love to do.
So, let us first recap 2019. The Dow Jones Industrial Average (DJIA), one of the oldest (1) market indexes made up of 30 “blue chip” public companies that have consistent earnings, was up 23.74% (1/2/2019 DJIA was 23,062.40 and closed up 5,475.04 at 28,538.44 on 12/31/2019) but had a total return of 25.3% in 2019 (2). Total return includes any interest, capital gains, dividends and distributions over the year.
The Standard & Poor’s 500 index, which is a broader index of 500 of the largest companies, gained 28.9% during 2019 (2). The NASDAQ was also up and had the highest of all these three indexes at a 35.2% gain for the year. The NASDAQ Composite Index is a combination of all the companies that trade on the NASDAQ (over 3,300), which many are technology, Internet based, consumer, financial, biotech and industrial companies.
These three indexes give us a good barometer of the overall market.
Some notable indicators; we had the lowest unemployment rate in 2019 in 20 years, markets were at record highs, interest rates remained at all-time lows and corporate earnings remained strong. The other amazing indicator that is shocking most financial pundits is inflation. Inflation, or some call it purchasing power, came in at 1.71% during the year (3). This means you would spend on average 1.71% more in 2019 than the prior year for the things you bought. Keep in mind, the inflation rate for 2018 was 2.49% (3). To put it in perspective, during the 1980s we experienced double-digit inflation. Wow, what a change and what a difference that makes in the economy.
The investment markets go up and go down, and sometimes they go sideways. As noted in the attached article. In 1987 the S&P 500 fell over 20% in a single day, but the full-year market return was up in 1987. This is the reason you should use a professional financial advisor that is a student of the markets and the economy. Most financial advisors who manage money watch the markets, where we watch both (we believe it’s a better strategy). Many investors react emotionally when a catastrophic event happens like in 1987 and get out of the market. Taking emotions out of the equation helps in making a calculated decision based on analytical data and experience. Experience matters in the grand scheme of things.
As we saw in the great recession of 2007 – 2009, investment markets can drop over 50%, but investment markets don’t do that all the time. Investment markets do have what are called “corrections”. Investopedia defines a correction as “a decline of 10% or greater in the price of a security, asset, or a financial market” (4). A market correction happens more times than a recession and can be a negative 10% to 20% or even greater. It is like catching a cold in the winter. You know you’re going to catch a cold, but you just don’t know when. We will have another correction at some time in the future and possibly another recession, but we won’t know “exactly” when it will happen.
Will a geopolitical event happen in 2020, or a political event, or maybe some sort of disaster? Sure, any of these or other events could happen and could trigger a market decline. But we believe the investment markets are in harmony in so many ways that we will have a good year in 2020. In fact, we believe the DOW will easily surpass 30,000 points and the S&P 500 and the NASDAQ will also have solid performances.
Here are some of the closely watched leading economic indicators:
The latest Real Gross Domestic Product (GDP) by country has collectively been improving (5). World Population Review sites the collective global GDP at $80.7B in 2017, $84.8B in 2018 and projects $88.1B in 2019 and a 3.6% growth rate. The U.S. is the highest due to our capitalism and entrepreneurial culture, high average income and low unemployment rates to name a few.
The M2 Money Supply in the U.S. is all the physical cash in circulation and money in banking accounts. According to FRED the M2 continues to be up for 2019 (6), which has been its pattern over the past 40 years. It is considered that an increase in the money supply helps to keep interest rates low, generates more money in the hands of the public and thereby stimulates spending.
The CPI (Consumer Price Index) measures prices from the consumer’s perspective, whereas the Producer Price Index (PPI) measures prices from the seller’s perspective (7). The PPI remained low for 2019 according to the Bureau of Labor Statistics (8). This supports the low inflation numbers in our opinion.
Consumer confidence provides an indication of future household consumption. Consumer confidence, although slightly lower, still shows resiliency and above the 100 rating (9). As of December 31, 2019, consumer confidence stands at 126.5 (10). This remains positive in our opinion.
U.S. housing starts went up 3.2% month-over-month in November of 2019 to an annualized 1.365 Million units, which is positive from our perspective. Housing starts received a boost from falling interest rates after the Federal Reserve cut key interest rates three times in 2019. This is another positive for 2020 in our opinion.
The bond yield curve is also another indicator we watch. The shape of the curve can be an indicator how interest rates will do in the future (11). An inverted curve can mean an economic downturn is ahead. Although the bond yield curve was inverted for a little time in 2019, it has normalized recently and shows a current positive sign in our analysis.
The other unknown is the U.S. – China trade war. The current administration has tackled the unfair trade practices that China has enjoyed for decades. So the debate is over China’s unfair trade practices and China stealing our intellectual property, which has been costing our country Billions over time. The administration recently said the Phase 1 of the agreement has been signed, which is good news. We believe this entire issue will get sorted out in 2020 and will be a huge boost to the market.
Corporate earnings have been strong in 2019, although a little up and down but forecasts remain good for 2020 (12). We are bullish on corporate earnings in 2020, which we believe will further fuel the markets.
The unemployment rate was at 3.5% in December 2019 (13), which we predict will come down a little more. This is the lowest level since 1969 and very bullish for a “goldilocks” economy in 2020. All our other indicators point to a phenomenal investment performance year in 2020 as well. It is also an election year, which although casts some doubts on who will be in office in 2021, we believe the current administration will pull out all stops to keep the economy growing during 2020.
In summary, many economists predict a slowing economy in 2020, but we don’t believe it’s going to slow down that much or lead to a recession. We are very bullish on the economy as all the indicators above and other things we watch suggest, outside of some geopolitical issues or the China Trade War not completely being resolved or some unknown economic or other catastrophic event happening. Rest assured that we are watching the economy and the markets closely and are constantly checking the pulse of both.
We appreciate your business and please let us know if we can help anyone you know. We are passionate about what we do, and we would be honored help others. As you hopefully know, “Experience Matters” when it comes to managing people’s wealth.
Schmolke Investment Team
Brian Schmolke
Bart Schmolke
“Experience Matters”
Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.
The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful.
All investing involves risk including loss of principal. No strategy assures success or protects against loss.
Bond yields are subject to change. Certain call or special redemption features may exist which could impact yield.
Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and bonds are subject to availability and change in price.
1. https://www.investopedia.com/terms/d/djia.asp
2. https://seekingalpha.com/article/4314929-performance-of-dow-components-in-2019
3. https://www.in2013dollars.com/inflation-rate-in-2019
4. https://www.investopedia.com/terms/c/correction.asp
5. http://worldpopulationreview.com/countries/countries-by-gdp/
6. https://fred.stlouisfed.org/series/M2
7. https://www.bls.gov/ppi/ppifaq.htm#1
8. https://www.bls.gov/news.release/pdf/ppi.pdf
9. https://data.oecd.org/leadind/consumer-confidence-index-cci.htm
10. https://www.conference-board.org/data/consumerconfidence.cfm
11. https://corporatefinanceinstitute.com/resources/knowledge/finance/yield-curve/
12. https://tradingeconomics.com/united-states/corporate-profits
13. https://tradingeconomics.com/united-states/unemployment-rate