At the end of 2018, we encouraged investors to stay disciplined and stay invested with the reminder that over time, cash is the worst performing asset class. While we weren’t specifically predicting it for 2019, cash returned to its place at the bottom of the return chart for the year. All asset classes from commodities to real estate, international and domestic equities, and all major fixed income categories posted positive returns for 2019. Over time, we expect assets to earn positive returns. The bias is always to the upside. Investors expect to be compensated for the risk they take and the economic benefit their dollars create. The magnitude of the return for 2019, however, was somewhat surprising. Equities1 were up over 30% on the year, and fixed income2 posted a strong 8.7%. Coming off a period in which markets were nervous about a recession, this took many investors by surprise.
Markets thrive on certainty, even when the outcome is less favorable. We came into the year with much uncertainty around Brexit, trade with China, and economic growth. Trade rhetoric between the United States and China has dialed down and the first phase of an agreement is in place, fueling optimism that a second phase will include tariff reductions on both sides. After Boris Johnson’s win and the resounding defeat of the Labour party in December, it became clear that Britain would exit the European Union with some sort of deal in place. While economists nearly unanimously expect this to be a negative for Britain, the path forward became clearer and markets breathed a sigh of relief. We expect the next year will bring its own uncertainties about how, exactly, this new relationship will balance the needs of both sides, but the resolution brought some clarity to a very uncertain situation.
It’s still the economy.
Politics dominated headlines in 2019. Impeachment headlines periodically rattled markets, and forecasted election outcomes caused some volatility throughout the year. Investors largely shrugged off these concerns, as they should. The intrinsic value of companies, or said differently, what they’re really worth, is determined by their earnings projections which are driven largely by economic growth. Economic growth is typically not impacted by an impeachment, and given our political structure in the United States, the president alone does not steer the economic ship. Population growth and productivity measures play a larger role, and monetary policy provides the framework for financial conditions and incentives for companies to borrow, invest, or scale back. While we believe that in the long-term these fundamentals will persist, we also believe that in the next year, investors will react to headlines and polls. Election years have historically been more volatile than other years, so it is important to stay diversified and keep the long-term perspective in view.
The Federal Reserve lowered interest rates three times in 2019 which boosted equity and bond prices. We do not expect any change in the fed funds rate this year unless the economic situation changes materially. While we expect political headlines to induce some volatility as we near the presidential election, we echo our advice from last year: stay disciplined. When markets are soaring, some investors are tempted to take more risk. Others are inclined to move to cash and take chips off the table. While it’s prudent to rebalance and move portfolios inline with risk and return expectations, we never advise trying to time the market. Over time, we still expect cash to be the worst performing asset class, and long-term investors should focus on their goals rather than year-to-year market returns. As we move into a new year, it’s important to reassess your goals. Reach out to your relationship manager to discuss your financial plan and how your investment portfolio is positioned to accomplish this. And above all, resist the urge to move in and out of markets based on headlines.
1Equities are defined as the S&P 500, which returned 31.5% in 2019.
2Fixed Income is defined as the Bloomberg Barclays US Aggregate index, which returned 8.7% in 2019.