December is always a good time to look back on the year, look at what has transpired, and look forward to what might be in store for us next year. If you read the paper or listen to the news, we do not have to tell you what has happened in the markets these last couple of months. Watching the late news on Christmas eve had an unusual main story… rather than watching Santa’s progress as he circles the globe (which has typically been a key component of Christmas eve news) we heard all about the fact that the stock market was on track to have the worst December since 1931. The S&P closed on Christmas Eve down 19.77% from its’ September 20th high. The NASDAQ was down even more, closing down 25% since September. With this very gloom reality, we were prompted to look back a few years to try to get a better perspective.
We maintain a list of “preferred funds” that includes approximately 40 equity and 16 fixed income mutual funds and exchange-traded funds (ETFs). Looking back five years we were reminded how good things really have been over the last few years.
- 2013 literally every one of our equity funds was up for the year and our bond funds were mixed with some up 1 to 2% and others down about the same amounts.
- 2014 was a mixed year – all U.S. equities were up, all foreign equities were down, REITS and infrastructure were up and all bond funds were up.
- 2015 was a down year with most U.S. equities in the red, and foreign funds mixed with all of our small cap foreign up and most large caps down. U.S. REITS were up again and all but a couple of the bond funds turned in positive performance.
- 2016 was a good year for our U.S. funds with all back solidly in the black with most returning double digit performance; foreign funds did an about face with large caps in positive territory and small caps in the red. Our favorite REITS once again all turned in positive performance and fixed income was mostly positive with the few bond funds that struggled having returns that were negative by less than one-half of one percent.
- 2017 was a banner year and the first year in history when the stock market was positive in all 12 months. All but one of the funds on our preferred list were in the black.
Therefore, perhaps we should not be surprised to see that when 2018 draws to a close it will be one of those very rare years when everything fell short of expectations and most positions ended up in the red. However, looking back to 2013 should help us keep some perspective on how far we have come in just the last five years even with this very ugly 2018.Just for the record, the S&P 500 Index opened at 1426.2 on January 2, 2013 and closed on December 31 this year at 2506.8, an increase of 75.8 percent. So even with the December turbulence, the longer run picture is very satisfying. By the way, Santa did finally arrive this year – he was just a little late. His gift was the market (semi) rebound that took place between December 26th and 31st as the S&P picked up 6.6% in just 4 trading days.
December was a difficult month with nearly all categories of investments turning in negative returns. As we look forward to 2019, it is becoming more likely we are in the waning stages of the current expansionary cycle. The current recovery period dates back to June 2009, so the current economic expansion is now nine and one-half years old. In expansion years, nine and one-half years certainly is living in late middle age and on the cusp of old age: the last three expansion periods (Dec. 1982 to July 1990, March 1991 to March 2001 and Nov. 2001 to Dec. 2007) lasted for an average of about 8 years each, with 1991-2001 leading the pack with a 10-year expansion cycle.
We can look to the Livingston Survey, published semi-annually by the Federal Reserve Bank of Philadelphia, as an excellent guide to what is most likely to work out in the economy next year based on a consensus of economic forecasters from industry, government, banking and academia.According to the December issue of the Survey, economists expect to see GDP growth come in at around 3.0% for the second half of 2018 then slowing to 2.4% for the first half of 2019 and 2.3% in the second half of next year. These estimates are a downward revision since the last Survey published in June 2018. They also expect to see continued low unemployment, with the unemployment rate at a steady 3.5% during 2019. Finally, their inflation expectations forecast CPI inflation at 2.5% for the full year 2018, then declining to 2.3% in 2019.
We have also read numerous 2019 economic outlook publications of major investment firms that tend to sprout up at this time of year.One virtually unanimous expectation is that we should expect to see the U.S. and global economy slowdown in 2019.The latest figures show U.S. GDP growth at 3.0% for the third quarter of this year, down from 4.2% in the second quarter, with inflation running right at the Fed’s target of 2.0%.Unemployment remains at a 50-year low at 3.7%. For next year, the economic consensus is that growth will slow but not stall, with most estimates for 2019 in the range of 2.5% to 3.0% for the year. Unemployment and inflation are expected to show little change.As described in the PIMCO 2019 outlook, the economy is expected to be “Syncing Lower” with a “synchronized global slowdown” but “on-going economic expansion.”Given that consensus forecasts are notoriously unreliable, we place little or no reliance on the actual point estimates for the economy, but absent a major disruptive event (one of those “unknown unknowns”) the direction is likely to be correct: slowing GDP growth, low unemployment and low inflation are likely to describe the economic environment for 2019. In the brightest note we could find, Livingston Survey participants forecast positive stock returns for both 2019 and 2020, with the S&P 500 finishing 2019 at 2900 and 2020 at 3000. Alas, only time will tell.
We will continue our policy of investing in a diversified portfolio as the best defense against difficult markets. As many years of experience have shown, those that have attempted to time the markets by trading in and out based on guesses about future returns have not been successful. To us, the big lesson from market volatility is the importance of keeping our plans up to date and revising these plans as the future unfolds.
Best wishes from all of us for a healthy and prosperous New Year.