T&T Annual Market Review - 2019
by Thomas Quinn on Jan 21, 2020
Reading Time: c.7 mins
What were the news cycles and the themes driving the market in 2019? As I write this I struggle to recall all the stories, the front-pages, the soundbite headlines that hourly came vibrating through my phone. As each market or political commentator reacted in (usually) faux awe and astonishment to that minute’s news cycle ‘breaking news’, I remember a blur of scandal, geopolitical woes, trade tensions, hurricanes, a blazing Notre-Dame and a Greta Thunberg.
However, as it turns out, despite uncertainty being the theme of investors, advisers and institutions alike, the broad global market barely blinked over the course of 2019.
There was a tariff on, tariff off yo-yoing between the largest economies in the world; the UK / EU divorce keeping the Brits and Brussels cohort wide eyed late at night as the ‘No Deal’ chances increased - seeing GBP fall to $1.18. The people of Hong Kong took to the streets to demand autonomy from mainland China’s extradition laws; Germany avoiding a recession by 0.1%; a strong Dollar and weaker China hurting Emerging Markets.
And yet despite this wall of negativity (much of it legitimate) the US market rose 31% (S&P 500) and the World ex-UK index returned 22% (MSCI All World ex-UK), Global Aggregate bonds rose 6.8% (Barclays Global Aggregate) and commodities 7.7% (Bloomberg Commodity Index).
The three prongs that drove these accelerated returns were:
- A deflated market on January 1st following the Q4 2018 correction (-19.9% may fall short of the -20% required for an official correction that makes it into the history books, but make no mistake, it was a correction)
- The Federal Reserve back peddling on tightening (rising) interest rates and instead cutting base line borrowing costs on 3 occasions.
- Sizeable, and heavily criticised, stock buybacks as businesses reap the rewards of the Trump tax cut with many choosing to spend their cash on company stock bolstering equity prices.
A Quarter in Review – Q4 2019
To start, the January edition of my quarterly market review is always the preceding year’s annual review, but let’s not forget about 4th quarter, after all without the 4th quarter Tom Brady would hardly have a ring for one finger!
It was a tariff-off quarter. The anticipated December 15 tariffs on roughly $160 billion of consumer goods was halted as a Phase One deal was put into writing (and shortly to be signed), bringing a reprieve for emerging markets, which were the best performing market of Q4 (up 11%). The Fed cut interest rates for the 3rd and final time that year.
In the EU, Germany avoided that recession, gains were strong (5.1%) over the union, inflation began to rise (rising to 1%) and we saw the new guard taking over at the European Central Bank (Christine Lagarde) urging governments to boost spending to increase demand across the region.
The UK have another Conservative government with a huge majority not seen for 30+ years. Despite all the blunders and Brexit kerfuffle, the Tories waffled their way through the 6-week election leaving the opposition in an existential shambles that could see them remain in power relatively unchallenged for years to come.
Bonds remained flat, oil prices rose slightly, and an ease fell across the markets over the Christmas break – cue Trump and Iran!
A Rising Tide Lifts All Boats
The Federal Reserve’s decision to lower interest rates came as a shock to many economists early in 2019, as the base line inflation target of 2% was only just surpassed and the PCE (personal consumption expenditure) inflation rate was left sagging at 1.6%. Typically, the ability to increase and decrease interest rates helps the Federal Reserve control inflation (the rising costs of goods and services). However, with inflation close to target, lowering interest rates appeared a decision that was called potentially too soon in this economic cycle.
Instead it appeared as if lowering interest rates would let this 11 year bull market run a bit longer, lowering the costs of borrowing, credit card debt, mortgages etc.- companies more likely to refinance debt and borrow more; consumers more likely to buy that new TV on store credit come Black Friday or stretch themselves to purchase that new home as the new mortgage costs became cheaper than they were last month.
This tactic employed most notably in 2008 to pull the US market out of the Great Recession is not one to be used lightly. In 2008 the Fed had the ability to cut rates by 5 percentage points, and it gladly took all 5, but that recession still forced millions out of work, institutions closing their doors and economic expansion was slow and painful to return.
Today the Fed has 1.5% - 1.75% to play with, before going to negative rates (the bank pays you to borrow money). Negative interest rates are for another quarter, but they come with a high degree of scepticism, a relatively unproven track record and an Everest of a hole to climb back out of.
However, in 2019 the Federal Reserve went ahead and cut the costs of borrowing thus making it a year that equities, bonds, commodities, real estate all finished up, rising all boats in the economic sea.
Stock buybacks are certainly in vogue at the moment, but why and what are they?
As the name suggests this process involves a company spending its excess cash on buying its own stock available in the market. Due to the lowering of corporate tax and interest rates, interest repayments became cheaper, businesses had more cash to spare.
Excess cash is usually spent in one of a few ways: increasing dividends, internal expansion, mergers & acquisitions, or kept for a rainy day. The cheaper, labour-less process of stock buybacks can inflate stock prices making a company look more attractive to investors and shareholders alike. In 2018 alone the S&P 500 companies accounted for $806 billion in buybacks.
However the practice comes with some fraught criticism. Buybacks can deprive companies from having the liquidity required when times are tough and sales decline. They mostly enrich the highest level of executives and directors who own the company stock and have annual bonuses dependent on the stock price of the company. Inflating the price of a company stock isn’t a direct cause and effect to building a strong company, it doesn’t help build that next plant, hire the next sales team, or purchase the next IP from an up and coming technology company.
The obsession around stock price performance, on the face of it, appears like a false economy but buybacks remained on trend for 2019 and starve long term stable economic growth.
We can’t remember seeing many analysts calling the S&P 500 at 3,250 at the close of business last year, so it is probably safe to say that they do not know what will happen this year either.
When you look back on 2019 you may remember the end-of-cycle concerns or the over-hyped pessimism, but your faith to not sell, to remain invested and essentially do nothing was in itself a proactive and positive decision. This year will not offer the same - there could be a downturn (there can always be a downturn). Or the next recession could finally arrive (it has to eventually, right?). However, since 1871 it has taken an average of 7.9 months to recover from a garden variety downturn and 2-4 years to recover from a full blown recession.
Temporary losses are the cost of participation to secure permanent gains. Your long term financial plan has assumptions for downturns, corrections and recessions built into it.
We know these things are coming, we know what they look like, but we don't know when they will occur. When your time horizon is 30+ years, the when really isn't all that important, provided you maintain that long term perspective.
And of course, if you don't have a financial plan and would like to look into getting one, please do reach out to us: +1 646 201 4865 / email@example.com
Taylor & Taylor Financial Services USA LLC is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and, unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.