Wow! We went into the 4th quarter 2019 with some apprehension based on what happened in 2018 when the S&P 500 ended the last three months of the year down 13.52% . The 4th quarter 2019 was much different as a dovish Fed and positive news on China trade woke up the bulls. The major indices ended the 4th quarter and the year as follows:
S&P 500 9. 0% 28.9%
DJIA 6. 0% 22.3%
NASDAQ 12.2% 35.2%
For the first time in a decade, U.S. Large Cap Value outperformed. During the quarter, there was tremendous rotation from growth to value as investors seemed concerned about overall market valuation and sought less expensive stocks.
So where do we go from here? Many prognosticators seem worried that the market has moved too far too fast, and that significant weakness may be in our near future. However, data suggests otherwise. Historically, very good years are usually followed by good years. Since 1950, there have been 18 of those very good years defined as up 20% or more. Of the 18 very good years, the market was up the following year 15 times with an average gain of 11.2%, much of the gain coming in the fourth quarter which was up all 18 times.
Also, since 1949, Presidential election years have averaged positive returns generally. When there is an open field running for President, the market has averaged a small loss by the end of the year. But, when the election includes the sitting (incumbent) President running, the market has averaged double digit returns.
There will be a pullback or two at some point this year. When we suffer a scary moment, we encourage investors to maintain calm. The market indeed does not go straight up. A good example is last year. Though we finished 2019 at an all-time high, there were times that tested our resolve. Starting May 3rd, the S&P 500 lost 7.4% over the next 31 days. However, it fully recovered from that weakness in just 17 days ending June 20th. Again starting on July 26th, the market uptrend reversed, and it went down 6.7%. Though it took longer this time, the market fully recovered from the drawdown by October 28th. In the midst of this second period of weakness, there was a pullback of 5.5%, which the market fully recovered from in just 22 days. Getting out of the market during one of these times of weakness, would have been a decision that created future opportunity cost.
We remain bullish intermediate and longer term. The market and economic fundamentals remain good, and even seem to be improving. Valuations are a couple of points higher than “normal”, but low interest rates and a higher growth rate usually support higher price to earnings ratios. With stable interest rates and trade tensions easing, we still believe this long bull market has more upside.
Happy New Year! Thank you for your continued confidence and trust. Subscribe to Latest News on our website where we post mid-quarter updates.