Traditionally the last few days of the year are spent writing recaps of the previous 12 months while lamenting the fact that the market is dead. As a former trader these days were the worst because fund managers typically donāt do much in the waning hours of a year so you spend most of your day catching up on HR paperwork and compliance exams. But you know what never sleeps? The needs of our private clients, and while volume is low in stocks it is never low in planning. Year-end is as busy as a tree shredder on Dec 26. Iāve already written about the past decade here and about 2019 here (click if youāre a big Star Wars fan) so letās spend today talking about 2020 and beyond. What should we expect from a fresh year as well as a fresh decade especially in light of such a big gain from the stock market.
Barring something impossible like a meteor hitting NY or me losing any kind of weight, the stock market will end 2019 up nearly 30%. What tends to happen after such a great year? I mean if stocks rose this much they must be due for some kind of pullback right? Well, my friend Ben Carlson wrote about this very thing right here: āSince 1926, U.S. stocks have been up double-digits 54 times (not including 2019). The average return in the year following a double-digit gain was 11.5%.1Ā The year following those double-digit gains saw positive returns 39 times (72% of the time) and negative returns 15 times (28% of the time)ā.
Look at the part I underlined because thatās where I want you to focus.Ā If you took any given year in the history of the stock market it has been positive 73% of the time and negative 27% of the time (past performance is no guarantee of future results). What youāll see from Benās stats is the exact same number so just because we were up big in 2019 doesnāt mean 2020 has to be down.Ā This is the beating heart of āevidence-based investingā: we donāt know what the future holds so we try and make high probability decisions based on the data we have.Ā The years following double digit gains acted no different than any random year. So what about 2020? What should we be on the lookout for?
Given that we have an election next year Iād expect some kind of volatility leading up to the event. The market will attempt to discount the outcome based on what it sees as the likely winner (tidbit: since the end of WW2 no incumbent has lost with unemployment under 7.5%. Itās at 3.5%). Remember: markets care about POLICIES not POLITICS. If it starts to see a high probability of āmarket unfriendlyā policies being enacted then it would start to price that in before the election. Donāt be surprised if random polls are the new trade war headlines (h/t @conorsen).
The economy and earnings will also likely be center stage as they always are. Keep your eyes on Jobless claims, Retail Sales, and New Home Sales because any consumer weakness will rattle the stock market. Also make sure you have one eye on Leading Indicators, especially this 12 months smoothed version (one of my favorite charts). Luckily for us economic data will have easy comps in the first half of the year (given the slowdown we saw in 2019) and the Fed is on the sidelines so Iām content with the way things are shaping up.
Remember how I said our advisors were busy planning right now? In the end that is and always will be the key to your success. Building a durable plan that you can STICK WITH even if the economy slows and the market sells off is crucial. You know what the longest drawdown has been in the history of the stock market (from the moment the market peaked until you made your money back)? 36 months. Can you and your plan handle 36 months of pain? If a giant bear market starts on Jan 3, 2020 are you equipped to handle it?
I will enter 2020 and the next decade optimistic about not only the World but the country that I love. 76mm Millennials are entering their prime working/home buying/family raising years and that demographic surge makes me hopeful about the next decade. Look, in order to be a stock market investor you HAVE to have some level of optimism about the future. Remember: more people wake up trying to make the World better than make it worse and that, my friends, is worth investing in.
Good luck in 2020 and stay tuned for more exciting content from your boy BullandBaird! Podcasting? Videos? Heck yea, I canāt wait.
My final link to you in 2019!!Ā People are Awesome!!
Copyright Ā© Michael Antonelli, Managing Director, Baird
