Now that the holidays are wrapped up and your new year is in full swing, we wanted to provide you with a recap of 2019 and a preview of 2020 from our Investment Committee. For those who are receiving an update from Crown for the first time, please know that we are honored by your trust and look forward to helping you achieve your financial goals in 2020 and beyond.
It’s worth immediately noting that geopolitical flareups traditionally have had little or no lasting impact on the markets or broad economy. While the U.S. and Iran situation could certainly lead to additional volatility, we do not expect it to be a major factor unless severe escalation occurs.
As we look back, 2019 was a wonderful year for investors with stocks, bonds and gold all higher. The S&P 500 gained 31% with dividends included, according to Bloomberg. International stocks gained 23% and large caps grew 31% beating out small caps, which gained 23%. Growth stocks beat value 36% to 27%. U.S. Bonds gained 8% on average while gold added 21%. The total value of US equities gained $7.5 trillion, the best year since 2013 when they gained $5.4 trillion, according to Willshire Associates.
The aforementioned 2019 returns were a strong bounce from a terrible Q4 of 2018, which resulted in stocks starting at a near low point last January. In fact, the S&P 500 only gained 14% from the beginning of October 2018 to the end of 2020, according to Forbes.
In our view, the main catalyst for stock gains in 2019 was the Fed easing policy that lowered rates three times and began adding money supply back into the system. The Fed added $400 billion to its balance sheet in four months, a $1.2 trillion dollar clip according to Evercore ISI. Additionally, 56 other central banks cut rates 129 times, according to central bank tracking service CBRates. These tailwinds helped allow markets stave off a trade war between the U.S. and China, a looming Brexit in Europe and various negative macro trends. Despite flat earnings the multiple of the market went from 16x to 19x.
Another major factor in 2019’s market growth was the U.S. consumer who continued to spend and help prop up global economies. The consumer remains strong as the economy has been expanding for 127 consecutive months bringing unemployment to a 50 year low of 3.5%. Wages are rising faster than inflation and low-end wages are rising faster than those of top wage earners.
Low interest rates, low inflation, strong employment, a resilient consumer and easy monetary policy have all played a large role in maintaining what is now the longest bull market ever. Since March of 2009 we have not seen a market drop of 20% or more from any high point, despite coming very close in 2018 and 2011.
We believe that this historical bull run has endured due to innovation in all areas of the economy, slow but steady GDP growth, lack of financial excesses and lower tax rates. These have all resulted in a prolonged business cycle. Some examples that have led to past recessions are oil price spikes and overleveraging by critical institutions. Innovation in the oil industry (fracking technology) has resulted in the U.S. becoming energy independent from the OPEC cartel. Greater bank regulation has slowed lending and poor lending practices. Additionally, innovation and disruptive technology from companies like Amazon has kept inflation and wages in check.
Heading into 2020 there is a good amount of optimism in the market as Q4 provided investors with clarity on three key issues that had potential to drag on the economy. First, we heard from the Fed and the European Central Bank that rate hikes are a long way off. Second, the Brexit worst case scenario seems to have vanished after the December U.K. election. Lastly, the U.S. and China have agreed to “phase one” of a trade deal. At this point the deal seems more like a truce but it’s unlikely the situation deteriorates from here.
Like all years there are plenty of risks still on the table. Valuations are stretched. Manufacturing data suggests contraction in the U.S. and other major economies. The yield curve has ceased flattening for now but could invert again. Europe and Japan still have a combined $11 trillion of negative yielding debt. While the Presidential election may not be the biggest risk ahead, it will certainly be the most visible. We anticipate 2020 will have more volatility. We do see earnings increases up to 10% however in 2020 helping valuations. S&P 500 earnings are expected to rise from $164 to $181.
From a larger perspective, we found encouragement from a review of a United Nations Development Report that revealed the gap in global basic living standards is narrowing with an unprecedented number of people escaping poverty, hunger and disease. A World Bank report echoed this sentiment by saying that more than half of the world’s population can be considered "middle class", with extreme poverty cut in half. We believe this trend will continue over the next decade as technology and innovation led by U.S. companies sets the pace for a more prosperous planet.
Steve Lindgren - Chief Investment Officer Doug Coppola - Investment Committee Chairman