Can we find some clues to what 2020 might hold? Ron Rough, FSA’s Director of Portfolio Management, shares some of his thoughts.
January Stock Market Update Transcript
Hello. This is Ron Rough with a market update video for January 2020. Happy New Year, and happy new decade as we start a new decade of the twenties. Today I wanted to talk about the outlook for this year, and I thought it might be interesting to take a very high-level look and look at this decade that just passed, the decade of the tens. It was interesting in a couple of respects. Number one, there was no recession that happened in this past decade which is unusual. Secondly, there were no official bear markets in this decade which, again, is very unusual. We did have several good corrections, 2011, 2015 and 16, and then also, obviously, the fourth quarter of 2018 where it was almost a full-fledged bear market but not quite. So if we think about the decade, though, the market finished averaging about 14% per year from 2010 through 2019, and that’s actually about 40 percent better than the average which, if you look at the S&P returns over the very long term, you’re looking at about 10 percent. So at 14 percent a year, we’re about 40 percent above average. Now if you look at the slide here, you’ll see that going back over the number of decades, the eighties and nineties were actually even better at 18% a year, and then we had other decades, the decade starting this century, where returns are actually slightly negative for the decade, so at 14% a year, very strong returns, that would suggest to us, looking at history for this coming decade of the twenties, to expect maybe in the range of about 7% a year.
All right, well, let’s take a look at a little bit more recent information. So 2020 is an election year. If we look at history, what can that tell us about the prospects for the market this year? What’s interesting, if you look at, historically, at history, stocks tend to do very well in the pre-election year and the election year. So last year was a very good year, and that falls in line with what we see from history. So I’ve got a table here that shows, going back to Franklin Roosevelt, first-term presidents and as they came in, as they came up for re-election, the returns in the pre-election year and the election year. You can see that the returns were very strong typically in the pre-election year, and on average, returns were decent in the election year. So again, I think looking at history, we should expect a reasonable year for the year of 2020.
Now, of course, in any year we have to look at what’s actually happening in the world, in the economy, in the markets, and so, for this year, obviously, the trade war with China is going to loom large for stock market returns for this year; the recent tension with Iran, that could loom large depending on what happens going forward. Obviously, a big issue for market observers and investors will be economic growth. We’ve seen GDP growth this year lower from three percent down to two, so all of these can actually have an impact on the returns that we actually see.
Now if we just go to the markets, as a technical firm, we spend most of our time looking at charts and patterns and use that to gauge our investment level rather than look at general economic fundamentals. You can see that we had a very sharp decline in the fourth quarter of last year. The first three to four months of the year all we did was recoup those losses, then we spent the next six months basically going nowhere, and all of the gains over the last two years going back to January of 18 really just happened in the fourth quarter of last year. Now the market is clearly in an uptrend, and our portfolios are basically fully invested across the board, all six strategies.
The other area that has us somewhat less complacent, I would say, if you look at the value line index here, the chart is not nearly as healthy. While we have had a breakout from the trading range and it’s bouncing along at all-time highs, the chart is not nearly as constructive as the S&P. And this represents a broader index of stocks, and so it’s an index that we like to look at to really get a better gauge of how healthy the overall stock market is.
If we go overseas and look at foreign stocks, the pattern is even less encouraging. This chart shows foreign stocks peaked in January of 18, and they’re not really anywhere close to their old highs. Now, for us, this is opportunity because possibly in 2020 we’ll see emerging markets and foreign markets play catch-up to the US market. That would be good, but the pattern overall is not that constructive for us or as constructive for us. So if we take all these things together, we’re pretty optimistic on stocks as we come into this year, but as you know, we have our safety nets in place, and if we get any unexpected shocks, we stand ready to pull the trigger on any of these positions and all of the positions, and we’ll certainly make sure that our number-one goal is to protect the portfolios. We take that quite seriously.
So until next time, thank you for watching.
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