1st Quarter 2020 Newsletter
January 1, 2020
Happy New DECADE! That’s right...only get to say it once every 10 years so we’re going to capitalize on the opportunity. The last year is in the books and like all previous years, it went fast, we all got a year older, & there were a lot of (alleged) life-altering headlines throughout the year. 2019 ended with a bang across global stock markets as shares continued to move higher. The calendar year returns for last year were no doubt impressive for the riskier investors, however, it is critical to keep things in context. Below are a few points to help put the current landscape into a balanced perspective:
Last year’s global stock market gains were driven by “multiple expansion.” Simple terms...at large prices increased amidst little to no earnings growth. For the S&P 500, earnings per share growth contribute only 8% of the gains while price expansion was responsible for 92% of them. Note that since March 2009, earnings have accounted for nearly 70% of price gains in the US stock benchmark. The forward 12-month price to earnings ratio is well above its 5 and 10-year average. Our view is that across the world, stocks have become notably more expensive following 2019 from a historical standpoint.
Economic growth slowed across the board last year as several countries dropped into a manufacturing recession. The US economy remained comparatively stable to the rest of the world as mostly debt driven consumption continued to support economic expansion. Total consumer credit relative to real disposable income is now at its highest level in history. In our opinion, borrowing to spend on disposable items for our daily lives has rarely been a long-term positive for the economy.
In reaction to the above-mentioned slowdown in corporate earnings and global economic activity; the US Federal Reserve increased monetary accommodation aggressively last year. Multiple interest rate cuts and the largest increase in the Fed’s balance sheet since the global financial crisis prompted speculation (See: buying) in a wide array of risky investments at home and abroad. With interest rates near all-time lows already, the Federal Reserve would not be acting in such a capacity if the outlook for economic growth was not deeply worrisome. While the Fed members and media continue to act as if the Fed’s actions are a great thing for a booming economy, we think, as our mothers told us, actions speak louder than words.
Our responsibility as wealth managers is to maintain a grounded perspective of both risk and opportunity regardless of short-term movements in markets. As such we find it necessary to emphasize that one year’s calendar return in the stock market should have no impact in determining your appetite for risk. (PSA: Things that go up, also go down.) Patience and perspective prove vital over time. The following are some general points regarding our current frame of mind:
We continue to favor safe fixed income mostly in the form of shorter duration US government bonds. Corporate bonds (like stocks) are richly priced and are highly pro-cyclical. This means that when the economic cycle does fully roll over bonds issued by companies are vulnerable to loss and may not diversify stocks to the downside. In our opinion, corporate credit has a very low reward as compared to the risk being taken at present time.
With stocks, we’ve never been believers of “chasing” the market higher based simply on price observation especially in the absence of improving fundamentals. We are also not fighting the recent move higher as the majority of our core longer-term holdings have remained unchanged for some time. Diversification outside the US presents a potential opportunity and we are patiently waiting for a sustainable catalyst. If monetary policy has saved the bull market, we believe there is no rush to capture upside. Value does exist in select areas but economic growth needs to accelerate before jumping onboard. It is interesting to note that the current market capitalization of Apple is now greater than the entire US Energy sector.
Beware of forecasts!!! Everyone but us it seems is pumping some kind of narrative on what’s going to happen this year and how much further the stock market is going to go up. I don’t think we need to go into a whole lot of detail here other than to remind everyone that no one has a crystal ball. We’ll continue to focus on managing risk for clients and will let the academics put out their guesses dressed up as research.
“History doesn’t repeat itself, but it often rhymes.” Mark Twain
Ryan Mumy, CFP® AIF®
Chief Investment Officer
Disclosures: The information provided in this paper is for general informational purposes only and should not be considered an individualized recommendation of any particular security, strategy or investment product, and should not be construed as investment, legal or tax advice. Capital Investment Advisory Services, LLC makes no warranties with regard to the information or results obtained by third parties and its use and disclaim any liability arising out of or reliance on the information. This information is subject to change and, although based on information that Capital Investment Advisory Services, LLC considers reliable, it is not guaranteed as to accuracy or completeness. Source information is obtained from independent financial data suppliers. For investment related terms definitions, please visit: www.investopedia.com Past performance is no guarantee of future results. Advisory services through Capital Investment Advisory Services, LLC. Additional information about CIAS and its From ADV Part 2A are available on the SEC’s website at www.adviserinfo.sec.gov