In the Market & Economic Outlook, we separate the relevant from the noise, to bring you timely content that helps you on the path to and through retirement!
STATE OF THE MARKETS (S&P 500 +3.36% YTD through 2/10/2020)
The first five stock trading sessions of the year usually provide an early indication of how the year might finish. Historically, when the first five trading sessions are higher, the year ends higher 82% of the time (Presidential election years since 1950).
This year the S&P 500 Index rose 0.7% in the first five trading sessions. That bodes well for the rest of the year. In addition, stocks tend to do well in Presidential election years, particularly when both stocks and bonds were strong the previous year.
2019 was a very unusual year as treasuries, gold, crude oil, and stocks were up over 10% each. That hasn’t occurred in over two decades!
Stocks had their best performance in six years. However, investors need to prepare themselves for a possible pullback given that stocks have rallied 15% since October. At these levels, the market is very close to fair-value having gone from 14-times earnings to 19-times earnings in 2019. That means there’s very little room for error. And it wouldn’t take much to derail things. Plus, investors are way too confident and sentiment is overly positive.
The big winner heading into 2020 is the U.S. economy, which could see growth accelerate more than 0.5% because of the China trade agreement and USMCA (U.S., Mexico, Canada) trade deal.
As part of the Phase I deal with China, they have agreed to boost imports from the U.S. by $200 billion a year over the next two years.
- Manufacturing ($32.9 billion in 2020 & $44.8 billion in 2021) goods like industrial equipment, pharmaceutical products, vehicles and optical instruments.
- Agricultural ($12.5 billion in 2020 & $19.5 billion in 2021) products include oilseeds, meats, cereals, cotton and seafood.
- Energy ($18.5 billion in 2020 & $33.9 billion in 2021) goods include liquid natural gas, methanol, coal, and other petroleum products.
- Services ($12.8 billion in 2020 & $25.1 billion in 2021) include educational related travel, financial services, insurance, cloud computing services.
In addition, China has committed to cracking down on intellectual property theft and forced transfer of American technologies. The U.S., for its part, did not implement tariffs on December 15. We also reduced tariffs on $150 billion of goods from 15% to 7.5%.
We believe this is a great time to de-risk your portfolio, particularly since stocks have rallied 36.2% since Christmas Eve 2018. That could entail reducing your overall asset allocation or taking profits in some of the more highly appreciated holdings or you could move assets from aggressive growth to value.
DIVIDENDS – A RETURN ON YOUR INVESTMENT
Another area we like are dividend paying stocks which provide a hedge against inflation and some downside protection should the market incur a sell-off. While most of the consistent dividend payers are not sexy names nor do they offer dramatic price appreciation, they do offer a steady stream of income that typically grows year-to-year. It is anticipated that 2020 will bring a record payout in dividends of $663 billion (up 7.2% over last year)
VALUE STOCKS – ARE VERY CHEAP!
Growth investing has been all the rage this past decade with many of the high-flying tech names leading the way. Value stocks are very cheap (relative to growth stocks) just for this reason. Growth stocks won’t go straight up forever and at some point, value stocks will be back in vogue. That’s why we are starting to de-risk portfolios by emphasizing value over momentum plays.
The so-called valuation spread between value & growth hit an extreme level 14-months ago. When that occurred back in 2003 & 2008, value outperformed growth by 22% and 69%, respectively, over the next year. Are we on the cusp of that happening again? It’s too early to tell, but we could be in the early stages of a major turnaround in value stocks.
Value stocks bounced back sharply in decades following underperformance compared to growth. For the 10-years leading up to 1998, value stocks underperformed growth by 3 percentage points, but outperformed growth by 6 percentage points the next 10 years.
When the market rises in the first five trading sessions (like it did this year) the rest of the year usually finishes well – up 82% of the time. In addition, stocks tend to do well in Presidential election years. However, in the short-run, valuations are stretched, investors are complacent, and sentiment has become overly positive – which could lead to a pullback. The economy got a big boost from the newly signed trade agreements with China and Mexico/Canada – these trade deals could add 0.5% or more to GDP.
This month, we are celebrating Valentine’s Day with a pic of our little loves! ❤️️