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March 02, 2020

2019 Q4 Market Review & Newsletter

I have often referenced that we must embrace volatility and suppress fear. Now is that time. Process must prevail over emotion. We must tolerate the short term and stand strong for the long term.

What is the short term? To us, it is a period of time you personally can be comfortable with. Wayne Thorpe, senior financial analyst at The American Association of Individual Investors Journal has recently shared the following statistics with its members:

Since 1871, market downturns have recovered as follows:

  • 33% of market downturns recover within a month
  • 50% of market downturns recover within two months
  • 80% of market downturns recover within one year
  • 95% of the time those big "once or twice in a lifetime drops" return to even in three to four years.
  • Collectively, since 1871, the time it takes for the market to recover (top to trough to top again) is a mere 7.9 months!

Having an understanding of the history of down-market recoveries can help us consider how much "under the couch" money you need to set aside.

To understand how truly confounding the final outcome of the 2019 market was, let's see how the Wall Street Journal recorded the events of the year in the market:

January: After much hand wringing at the end of 2018, on January 8th this headline "Signs Point to Strong January in Stocks."

Then January 22 - “From Overoptimistic to Sort of Pessimistic ... investors are gloomier than a year ago."

January 23rd - "Stocks Slide on Growth Worries."

January 24 - "Strong Earnings Power Stocks," then at the end of the month "Stocks Rally – but Worries Linger!"

The stock market closed January up +8.0%.

February: Through the month of February, these headlines: "Nasdaq Nears Bear-Market Exit;" " Bull Market's Test: An Earnings Slump;" "Most Stocks Are Up and Yet Some Worry; " "Late Rally for Dow Keeps Streak Alive;" "Bullish Signals Bolster Investors;" "Dow Gains 1.5% to Break Losing Streak;" " Stocks Gain as Shutdown, Trade Fears Abate;" "Dow Falls on Weak Data, Earnings;" "Nasdaq Climbs in a New Bull Run;" "Stocks Surge to Start Year:"

The market closed +3.2% for the month and +11.62% year-to-date.

March: The first week of March ended with "Slow Growth Prods Central Banks;" "New Growth Worries Sink Stocks;" and "Economic Worries Weigh on Stocks." By the middle of the month, on March 16th, things are looking up with "Tech Shares Lift Up Stock Prices." Then days later: "Stocks, Oil Head for Crossroads as rallies reach critical levels, some say economic uncertainty may be a damper." By the beginning of the third week, "Growth Fears to Keep Fed on Hold," and "Fed Slowdown Signal Hits Stocks." The month ended with "Inverted Yield Curve Is Telling Investors What They Already Know ... Long term bond yields plunging below short-term ones is a good predictor of Fed rate cuts and an economic slowdown ..."

The market the month +1.9%, with the first quarter ending +13.7% led by tech, industrials and energy.

April: April started with bad news and good news – April 1st and 2nd: "Second Quarter Pause Often Follows Rally ... fears of slowing global growth and trade worries could make it difficult to repeat performance in the second quarter" and "Factories Pick Up, Calming Investors in U.S." On the 3rd, "Investors Turn to Safety of Treasurys" then the 11th, "Treasury Yields Feel Downward Pressure." Then the very next day, "Treasury Prices Decline on Jobs Data, Inflation" (Note that investors buying Treasurys at a higher than normal rate would cause prices to go up and rates to fall, and yields going down also indicate rising prices; followed then by prices going down and rates going up). On the 15th "Global Rally in Stocks Gathers Momentum" then the very next day "Weak Earnings Depress Stocks" and "Treasurys Steady as Traders Await Data." On the 22nd this concern "Investors Gauge if Rally Is Near Its End ... Some worry about having large holdings of stocks in case volatility returns ... The index's surge surprised many Wall Street banks that had expected a much slower rebound from 2018's turbulent finish." At the end of the month, on the 25th, "Treasurys Rise Amid Economic Worries" and "Stocks Edge Down From Records," but ending on a high note April 29th with "Low Inflation Reading Keeps Rally Alive."

April ended up +4.1% with the year-to-date number now at +18.3%.

May: Small company stocks begin to make a comeback -"Fed Pause, Dollar Feed Small Cap Hopes" and "Stocks Set Milestone For Start To the Year ... Major U.S. stock indexes enjoyed their best four months start to a year since 1999." Then by the middle of the month "Weaker Inflation Views Stir Fed Fears and "This May Not be Another Dip to Buy ... The problems behind stocks' recent tumble aren't the kind the Federal Reserve has the power to fix ... this latest dip really might be reason to worry" and on the 21st "Investors Wager on More Stock Turmoil ... A growing number of investors are betting that markets will stay erratic as a renewed bout of trade worries roils global markets." The month wrapped up with "GDP Growth Held Firm in the Quarter."

The market ended the month down -6.4%! They finally got one right.

June: The month begins with bad news – "Nasdaq Hits Correction Territory” (a "correction" is a 10% or more drop off the last high). By the end of the first week, the news was clear "Stock ETFs Shed Record $20 Billion in May," stock investors panicked in May and many bailed out during that rocky month. But the same day, this news "Dow Soars on Hope of Rate Cuts" and "Stocks Rally on Rate-Cut Prospects." On the 15th "Stocks Take Breather But Log Weekly Gain." On the 18th this telling news: Share price gains for tech are as follows – Facebook +44.2%, Microsoft +30.8%, Twitter +26.8%, Amazon +25.6%, Apple +22.9%, while the S&P 500 is up a mere +15.3%. If you aren't heavily invested in huge tech companies, you're missing the rally as it's these stocks pulling up the average, given their very significant weight in the index. "Stocks Cap Best First Half Since '97."

June ended up +7.1% and the year-to-date return is now at a healthy +18.5%. Financials, Materials and Information Tech lead the S&P 500. "For Better or Worse, Tech is Still Leading the Market ... The S&P 500 Information Tech Sector finished the quarter up 5.6%, extending its 2019 advance to 26%.

July: "Investors Buy Bonds Even as Shares Rally ... Investors are piling into bonds at a record pace, a sign that caution remains despite stocks pushing toward records. Dimmer expectations for global growth have pushed S&P 500 companies to cut their forecasts, pushing the estimated earnings growth rate for the year to 1.6% down from 3.0% in late March."

July ended with the market up +1.4%. Year-to-date the stock market is now up +20.2%

August: Friday, the 9th "Dow Jumps as Beijing Eases Fear ... The U.S.-China trade war entered a new phase this week after the Chinese currency depreciated ... after the U.S. threatened to expand tariffs. That pushed stocks sharply lower on Monday, with all three major indexes suffering their biggest single day pullbacks of the year. " "The Turn in the Yield Curve ... that tends to happen ahead of recessions." August 15th, "Stocks, Bonds Flash Warning Signs ... Dow has worst drop in 2019 as Treasury yields flag dangers to economic outlook" and "Global Economic Slowdown Deepens." But by the end of the month "Stocks Up on New Trade Optimism," however, "Tech Giants Lose Luster For Investors."

August ended down a mere -1.6% after all the doom and gloom about recessions.

September: On the 4th this warning – "Don't Ignore This Recession Sign ... Signs of a possible recession keep stacking up. At some point it no longer makes sense to keep explaining them away. The latest grim omen came Tuesday as the Institute for Supply Management's manufacturing Index fell to 49.1 in August ..." Then on September 10th – "Investors Bet on Big Gains for Gold* & Silver ... The precious metals market ... has come roaring back in 2019 ... with the U.S. in the midst of the longest economic expansion on record, recession worries have escalated." Then, surprisingly, on the 14th this revelation – "Stocks Rise for Third Week In a Row" and on the 16th "Growth Refuels Stock Rally." On the 24th this bad news "U.S. Manufacturing Joins Global Retreat ... Investors flocked to government bonds and gold as they fled riskier assets such as stocks." But two days later "Trade-Deal Hopes Lift Stocks." At the end of the month, just another two days later on the 28th this ominous news "Slowdown Spreads Across U.S. Economy." [*Note that gold ended the year up +18.87% vs. +31.5% for the S&P 500.]

The market ended the month up +1.9% and year-to-date up +20.6%.

October: October started with more concerns about the economy and the market – 10/1 "Investors Search for Yield as Outlook Darkens on Growth" ; 10/2 "Treasurys Soar Amid Slowdown Concerns"; 10/3 "Stocks Slide Amid Downturn Fears"; and 10/4 "Stocks Start Quarter on Shaky Ground." A few days later, on 10/7 "Earnings Outlook Threatens Stocks" and 10/9 "U.S. Earnings Flash Worrying Signal." But wait! The very next day on 10/10 "Stocks Rally, Led by Tech Sector!" and 10/11 "Stocks Get Lift From Improving Outlook For Trade." Sadly, this next news just demonstrates the danger many investors face who do not have a realistic plan for their long-term investment goals "Stock-Fund Outflows Are Biggest in Decade!" Where did this money go? "Investors flocked to bond funds and plowed a record amount into cash in the latest quarter amid U.S. China trade tension, ... Brexit, and mounting concerns about the global economy." Then on 10/16 "Stocks Jump On Strong Start to Earnings" but the very next day "Stocks Weaken As Retail Sales Slip." Wow. Anyone getting a headache yet? Then 10/21 "Global Risks Send Investors on [Safe] Haven Search ... some investors are boosting holdings of cash and other assets that tend to hold their value when markets turn rocky." On 10/22 this surprisingly good news: "Stocks and Bonds Stage Biggest Simultaneous Rally in Decades!" Nonetheless, the naysayers refuse to give up on the bad economic news. On 10/25 was this headline: "Economic Growth in U.S. Feels Pinch ... Business activity continued to slow around the world heading into the fall, with the U.S. showing signs of tepid growth ..." Then, finally, October ended and not a minute too soon, with this headline "Stock Market Rallies in Measured Fashion."

October closed with the market up +2.2% for the month and +23.2% year-to-date.

November: Let's take a break for November and just say that November was more of the same and ended up for the month by +3.6%.

December (whew, finally!): Believe it or not, December began with "Stocks Projected to Slow! ... Analysts see no repeat of 2019's gains in 2020." Well, given their track record I'd say that's no real cause for alarm. The headlines continue to ignore 2019 and want to focus on next year. On the 4th this headline, "Good U.S. Economy Isn't a Given in 2020." Ever get the feeling that bad news sells better than good news? Well, here ya go: "Dow Falls 28 Points on Tariff Fear" and "Tariff's Loom Over Investors' Hopeful Picture." By the start of the second half of December, this good news: "Growth Outlook Improves As Trade Fears Ebb." And four days later, "Stocks End Week at Fresh Highs" but by the 18th "Relief Rally Shows Signs of Weakening." But hey, that's just Thursday; by Friday, the very next day, this observation is made in Monday's paper: "Bullish Attitude On Stocks Picks Up." On the day before Christmas, "Gold Rallies as Economic, Trade Worries Linger" yet the very same day "Markets Rally Like It's the '80s." Believe it or not, on the day after Christmas, in an article titled "Lessons Learned in 2019" this observation is thrown out there "An Easy Year to Make Money." Are you kidding me? This is an inside joke I'm sure, but it is put out there as a serious conclusion to a year that could not have been more confusing, angst-filled and frightening for most investors.

Staying the course in a year like 2019 takes intestinal fortitude, or a strategy to stay committed no matter how hard the news of trade crises, economic collapse, weak manufacturing numbers, earnings surprises and on and on... What did you get for ignoring your emotions? A stock market increase of +31.5% for the year!

Finally, "The market climbs a wall of worry." It did just that, ending the year up +31.5%. There are positive factors driving the economy. Wages are up. Spending is on the rise at a healthy pace, as is saving. Unemployment continues to see historic lows although a worker shortage is likely. Inflation remains in line even as money remains inexpensive and easy to access. Corporations are holding back cash and lower tax rates will have a positive effect on after-tax earnings.

Markets are driven in the long term by earnings growth—it’s just a fact. According to Fritz Meyer, S&P 500 earnings are expected to grow 10% over one year. And though a +31.4% increase over one year is solid, the two year the return is a more normalized +12.1% for the S&P 500, +10.0% for the Dow and +14.0% for the Nasdaq. These are solid numbers, but not off the charts, or out of line with reality.

This is what we want you to learn: When we read headlines that create anxiety and emotion, take note of 2019. Remember the blown-up concerns and drama constantly presented by the press. We could indeed be worse off this year, but a year is irrelevant for the wise and unemotional investor.

We can’t wait to continue our relationship with you in 2020. Onward!

Have a fabulous year,

Wayne

**Adapted and with reference and credit to Clark M. Blackman II, newsletter, Jan. 13th. Mr. Blackman II is president and C.E.O. of Alpha Wealth Strategies, LLC

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