Markets, Economy

Weekly Kickstart (12/30/2019-01/03/2020)

12/30/19 8:00 AM

iStock-626627280.jpgStocks continued higher last week, as the S&P 500 rose by 0.58 percent to 3,240.02. That was another new all-time closing high and it left the benchmark index up 29.25 percent 2019-to-date. Save some unforeseen shock during the final two days of December, the S&P 500 should finish 2019 with its best annual gain since 2013. These returns, though, only look so extreme because of how abysmal the end of 2018 was for the markets, and compared to last year’s high-water mark major indices are only up around 7-12 percent to date. That is more in line with historical norms and by some measures stocks are still not as extended as they were earlier this year. Even taken at face value 2019’s substantial gains would historically have not been a harbinger of an impending market top. For example, since 1927 the S&P 500 has posted an annual return of at least 25 percent on 18 occasions. Two-thirds of these occurrences saw additional gains in the following year, with an average increase of 15.87 percent (+5.95 percent full sample).

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Clearly strength often begets strength in the stock market, but even favorable historical comparisons do not necessarily mean it will be smooth sailing for investors throughout the new year. This is especially true with the uncertainty likely to still be surrounding U.S.-China trade relations, global economic growth, and corporate earnings in 2020. Political risk could also be elevated next year due to the upcoming elections, and VIX futures suggest the markets are already anticipating an increase in volatility as we near November. Altogether, it appears that equities can continue to advance in 2020, but the path forward may be choppier than we enjoyed in 2019. This is not too concerning for experienced investors who recognize that volatility is a natural occurrence in the market. Moreover, the S&P 500 has posted a positive annual return in 29 of the past 39 years, with an average (geometric) gain of 8.4 percent. During this same period the broad index has also experienced an average intra-year drawdown of 13.9 percent, whereas the largest peak to trough decline in 2019 was just 6.8 percent. That is relatively low, so even if the bull market continues in 2020 it would not be surprising to see higher volatility and larger drawdowns at some point in the future. Any regular investors unsure how to navigate this environment should take advantage of the latest run-up in stock prices by consulting with a professional financial advisor to make sure their positioning is properly aligned with their risk tolerance, retirement goals, and other unique variables. As always, we are here to help with any questions you may have.

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To recap a few of the things we learned about the economy last (holiday-shortened) week, the positives included that new home sales firmed, initial jobless claims fell, and core capital expenditures, an important proxy for U.S. business investment, continued to rebound as trade tensions eased. As for the negatives, mortgage applications declined, demand for American-made durable goods disappointed forecasts, and regional manufacturing gauges deteriorated. This (holiday-shortened) week the pace of economic data remains slow but there are still a few important reports on factory activity, housing, and employment scheduled to be released, along with the potentially market-moving minutes from the last FOMC meeting due out on Thursday.

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What To Watch:

Monday

Tuesday

Wednesday

  • New Year's Day
  • Markets closed

Thursday

Friday

 

 

Sources: Econoday, J.P. Morgan, CBOE, Twitter, FRBSL

Post author: Charles Couch

Disclosures