2019 Recap: A Year of Financial News Noise and Normalcy
On a special episode of Stock Talk, CIO Chris wraps up and provides an overview of what happened in the markets in 2019.
Chris Perras: Hey there. Good morning. My name is Chris Perras. I’m the Chief Investment Officer at Oak Harvest Financial Group in Houston, Texas, and welcome to the December 20th edition, of our weekly Stock Talk Podcast: Keeping You Connected To Your Money. Sitting at another new all-time high on the S&P 500, I want to recap the year of 2019 a week early. Yes, the markets can move in the last week or two of the year. The fact is they can move up or down by about 1.5% to 1.75%. This podcast though is an overview in the year that was and it’s titled, 2019 a Year of Financial News Noise and Normalcy.
As of today, the S&P 500 sits close to 3,200 and a year-to-date return of approximately 27% to 28%. Listeners, this is a fantastic number. However, please recall that this is off a very low base of near 2,350 on the S&P 500 that we hit almost exactly a year ago today on Christmas Eve in 2018. That was on the back of the Federal Reserve raising interest rates too high too fast.
In fact, the stock market as measured by the S&P 500 went literally nowhere net between January of 2018 and October 4th of this year. That’s 21 months of ups and downs. That’s 21 months of no net return. A better return metric for long-term investors is that the S&P 500 is now up about 11% since the bull market returned this past fourth quarter.
Throughout 2019 investors were bombarded with wild sentiment swings in both positive and negative news stories. Go ahead and recall back to the first quarter of 2019, the financial press was out in force with prediction of recession odds and quoting billionaire hedge fund managers who were all out predicting further market meltdowns and crashes. What did the markets do throughout the first quarter of 2019? Yes, they recovered pretty much in a straight line through early April.
In early April, what happened? The financial press was out in force quoting “Smart Money investors” who by mid-April, that’s tax day, and then again in late April Easter weekend, were out in mass predicting melt-up scenarios and absurd short-term upside forecasts. Of course, nearly a week later, the stock market did its normal second quarter dead zone drop on the back of President Trump upping his tariff trade negotiation tactics and by doubling down on tariffs on China and some other of our trading partners.
Investors then had to endure a very normal seasonal second and third-quarter economic slowdown. Throughout this second third-quarter period there were daily stories and quotes from billionaire hedge fund managers, economists, academics, and politicians calling for recessions, calling for market collapses, and even one noted investor pretending a return to the 1930s. Wow. Every day, if you were unfortunate to tune in the financial news networks, there were stories of Brexit concerns. China, Mexico, and Canada trade worries, inverted yield curves and their implications, and the presidential impeachment.
There was talk of unprecedented volatility in the markets, looming Black Swans in the repo overnight lending markets, and repeats of the fourth quarter of 2018, which saw a -20% sell-off. There were stories of how smart money was already out there hedging their portfolios for 2020 because there’s a presidential election coming up, which might bring a negative 30% decline in stocks, an election that was 18 months out. That seemed absurd to the investment team at Oak Harvest. At that time, the herd was uniformly telling their clients, it was scary out there and uncertain, and it was time to hide in utilities and staple stocks.
As we’ve stated all year, there was one event that mattered more than all the rest of the news stories combined. What was that event and when did it happen? Well, listeners, it happened January 4th of this year, when the Federal Reserve admitted to having made a mistake and having raised rates too high. As of that date, the stock market and the leadership within it, within both groups and sectors, have been spot on normal. They have been consistent to the same periods this bull market cycle when the Federal Reserve was pausing or easing interest rates.
You did not have to go back to data-mine or make analogies to time periods decades removed from now when today’s investor base wasn’t even born yet. It was on that date that the investor playbook for easing is easing started being laid out for the rest of 2019 and most likely for 2020. It was on that day that Federal Reserve laid out the overall path for market volatility. It was on that day that had you blocked out the noise produced by the financial press that the macro investing playbook changed. By July of 2019, the Federal Reserve was starting their actual cutting cycle which has led them to cut by three times this year.
For the last 18 months, much of the financial press bickered and argued about when, how much, and why the Federal Reserve would cut rates. They discussed and tried to predict ad nauseam the path of the Federal Reserve by way of quoting the 99% useless Fed Funds futures market as a predictor. Hell, they even argued over the name of the easing policy. Is it QE4? Is it cutting rates? Is it blah, blah, blah? All through it, the team at Oak Harvest has consistently said the same thing. We said easing is easing, exactly when, why, and how is not important, and it’s certainly not important what you call it.
The S&P 500 is up what I will argue, given its very low starting point, an overstated 27% to 28%. All sectors including the laggard energy sector posted positive returns. The best outperforming sectors were technology at 45%, led by Apple, communication services up 30%, led by Facebook and Google, and financials up 28%, led by JP Morgan. Just behind these three sectors and slightly lagging the S&P 500 were industrials up about 25.5%, and consumer discretionary up about 24.5%.
What do these groups all have in common? Yes, you guessed it, they are all offensive-minded economic sectors. They all outperform the S&P 500 when volatility is high and peaking. They outperform when the economy is turning up and improving, not when it’s topping and starting to slow. They are all the groups the herd avoided almost all year and have only recently started recommending.
While all sectors were positive this year, what groups lagged and underperformed the S&P 500 in 2019? Here’s the list. Besides the woeful energy sector which returned 6%, the underperformers were consumer staples at +22%, real estate at around +21.5%, and utilities up around 21%. Now, listeners, don’t get me wrong, these are all positive returns and we should be elated. However, I want to point out that nearly every sector that was pitched and touted by the financial experts on TV news channels or by way of those subscription-based financial newsletters, underperformed the S&P 500.
All of these safety low volatility groups the billions of dollars flowed into by way of ETFs and that were touted throughout the year did the same thing, they all lagged the S&P 500. Why? Because people touting these investment strategies were reading the wrong playbook. They were stuck rereading the correct playbook that was used in 2018. They didn’t see, heed, or grasp what the Federal Reserve started on January 4th, 2019. They missed the first edition early release of the easing is easing book.
Some other year-to-date asset returns are as follows. Large-cap technology as measured by the NASDAQ 100 was up an outstanding 36%, the broad banking index was up 32%, small-cap stocks as represented by the Russell 2000 or the IWM ETF gained about 23%. However, since October 4th, when the markets pivoted up, small-cap stocks have outgained the S&P 500 by about 30%. They have gained almost 15% while the S&P 500 has gained around 10% to 11% in that time.
As for international stocks, most major markets have gained year-to-date but because of the strength in the US dollar through late September, almost all international markets lagged the US market. For instance, the Dow Jones global index X the US market was up a respectable 17.5%. Some of the larger European markets like Germany and France just barely lagged the S&P 500 with returns of 25% to 26% respectively. Most Asian markets dramatically lagged the S&P 500 except for one. The one Asian market that dramatically outperformed the S&P 5o0 in 2019? Listeners, you get one guess. Anyone? Anyone? The China Shenzhen index was up 35% in 2019. Yes, a Chinese index beat the S&P 500.
Overall since January 4th, 2019, has been a very normal year for this bull market cycle when the Federal Reserve pauses and begins easing interest rates. Most investors and most financial advisors got caught up in the daily and weekly noise that was extolled by the financial news networks throughout the first 11 months of 2019. Hopefully, listeners of this podcast heeded our constant reminders all year of rule number one, don’t fight the Federal Reserve. Rule number two is the Federal Reserve controls the overall direction of volatility. We expect more of the same in the first half of 2020.
If your advisor stopped buying stocks for you this summer because he was concerned about the outcome of the China trade deal, only to recently say they were back in buying stocks again after they’ve already rallied 10% to 15% in four months because of a trade deal, give us a call at 281-822-1350.
Selling fear and buying greed is not a systematic investment plan. The team at Oak Harvest wants to help you navigate your retirement. We want to help you manage your emotions around your savings and we want to make sure that you only have to retire once in your life with a customized retirement planning. Many blessings and Merry Christmas. This is Chris Perras, Chief Investment Officer at Oak Harvest.
Speaker 2: The preceding content expresses the views of the speaker and is for informational purposes only. It is based on information believed to be reliable when created, but any cited data, statistics, and sources are not guaranteed. Content ideas and strategies discussed may not be right for your personal situation and should not be considered as personalized investment, tax or legal advice, or an offer or solicitation to buy or sell securities. Investing involves the risk of loss and past performance does not guarantee future results.
CFA®, CLU®, ChFC®
Chief Investment Officer, Financial Advisor
Chris is a seasoned investment professional with over 25 years of experience working with some of the most successful money management firms in the world. Chris has made it a point in his career to adapt as the market landscape changes, seeking to utilize the appropriate investment strategy for a given market environment. His transition from managing billions of dollars at the institutional level to helping individuals and families retire is guided by a desire to see first-hand the impact he is making in the lives of clients at Oak Harvest.