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Dear clients and friends,

 

At Perseus Wealth it is very important to us that you are well informed about what’s happening in the markets.  Here is a brief recap of what has been going on over the last month or so and what we expect in the month ahead.

2020 Continues its pace from 2019

What’s going on? Although the decade came to a close at the end of 2019, the economy, which began its current expansion over 10 years ago, continues to move forward with growth. U.S. consumers continue to serve as the backbone for the U.S. economy, continuing to account for more than two-thirds of GDP. Wages and inflation were similar in 2019 to what they had been during the rest of the 2010’s and unemployment rates continue to fall one decimal place at a time. Many of the sources causing the largest swings in major markets over the last year, such as interest rate changes by the Federal Reserve and trade disputes between the U.S. and China, have found some resolve (even if temporary). Even military conflicts between the U.S. and Iran and notable government votes such as the U.K.’s “Brexit,” were seemingly shrugged off by markets, signaling either that investors (positively) have conviction in the current strength of their investments or (negatively) they have become increasingly complacent.

Why is it important? At the end of 2018, the S&P 500 dropped -19.8% from its all-time high seemingly driven largely by tariffs and consistent Federal reserve rate increases. In early 2019, positive economic data would create a market sell-off in anticipation that the Federal Reserve would continue to raise interest rates. Conversely, negative economic data would have markets rallying in hopes of lower Federal Reserve rates. These movements became known as “opposite days” and confused even savvy investors. With the Fed reversing its prior efforts to raise rates, successive interest rate decreases led the market to quickly recover its late ’18 drawdown but a lack of earnings increases resulted in a mid-year “soft patch” until the end of the third quarter. With improvements in trade negotiations, an anticipated conclusion to the Brexit ordeal and the expectation of earnings growth re-emerging in 2020, the market enjoyed a 10% surge in the last quarter of the year. When combined with an almost 20% recovery from the ’18 December lows, ’19 will go down in the history books as one of the best calendar year performances in U.S. history! (When viewed from the point of the market highs in September ’18, however, almost the entire gain for the 15 month period occurred in the last 3 months.)

What do we think about its potential impact? Although markets have recently reached new all-time highs, it’s important to note that attaining new highs doesn’t mean that intermediate returns will be negative. In fact, about 80% of the time, the S&P 500 has positive returns one year following a new high (1). Therefore, focus should be on the context of the market environment:

  • Expectations are that the Federal Reserve will not raise rates in the near future;
  • Economic factors have been improving for more than four months; and
  • Phase one tariff agreements between the U.S. and China have been completed.

All eyes now will be on economic data releases pertaining to the health of the U.S. consumer AND corporate earnings - which will need to grow in order to support the price expansions seen at the end of 2019.

The month ahead: We will be closely monitoring future economic and corporate data as they are released over the coming months. Earnings will likely be the most important component of the ongoing price movements; the consensus from analysts currently projects a return to earnings growth over the course of 2020 (2). If earnings come in below expectations or the consumer begins to show signs of weakness, then some contraction in the markets would be expected and volatility could increase. However, if positive data continues to be published, then the market should continue to do well.

The bottom line 2019 was a great year for returns in almost every major asset class. Therefore, many investors may feel reluctant that the performance can continue. However, it is important to frame the current market within the context of its environment, as well as its price, to better understand the possibilities ahead. The “opposite days” of 2019 are no longer the norm. At this time, there does not appear to be a significant concern about the possibility of an economic recession within the next 6-9 months. We will continue to monitor important sources of information as they are reported and as always, please call us with any questions.

 

 

Best,

 

John and Sean

 

 

The opinions voiced in this material are for general information only and are 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 any strategy will be successful.

(1) https://www.etftrends.com/etf-strategist-channel/dont-look-down-investing-at-all-time-highs/

(2) https://insight.factset.com/sp-500-earnings-preview-cy-2020