As we hope we have made plain, our overall principle of investment advice is goal-focused and planning-driven, as sharply distinguished from an approach that is market-focused and current-events-driven. Long-term investment success comes from continuously acting on a plan. Investment failure proceeds from continually reacting to current events in the economy and the markets.
We are long-term equity investors, working steadily toward the achievement of our most cherished lifetime goals. We make no attempt to forecast, much less time, the equity market; indeed we believe these to be fool’s errands. With all that said, we are still happy to look back at what the year was…
Year in Review
It is always interesting to look back at the ‘happenings’ of the previous year. Some things you may have forgot happened, while other events feel like they happened years ago. Recall: the year began with a shutdown of the Federal Government; the Notre Dame Cathedral fire; and a continuation of the US-China trade war. During the year we witnessed the first ever pictures of a black hole; all Boeing 737 Max airplanes were grounded due to crashes and faulty design; US Women’s Soccer Team winning the World Cup; Hong Kong citizens protesting the Chinese extradition bill; the College Admissions scandal; Tom Brady winning his 6th Superbowl (and Robert Kraft got into some trouble) and the U.S. House of Representatives voting for impeachment of the President. These were just a few of the most notable moments in 2019.
Along with these notable moments and events, the stock market posted tremendously positive returns. There is no doubt that we continue to experience the bull market which began in March of 2009, which was the very bottom of one of the greatest bear markets of all time.
From an economic and investing perspective, 2019 was the mirror image of the previous year. 2018 was a dramatically outstanding one for the American economy—and for corporate earnings and dividends—despite which the equity market couldn’t get out of its own way, and ended on a terrific downbeat (a 19.8% peak-to-trough decline in the S&P 500 through Christmas Eve). This past year was the exact opposite: an exceptionally good year for investors — the U.S. stock market made new market highs (S&P 500 up 31.5%). Equities across the globe increased by approximately 27% and stocks advanced 9% in the 4th quarter of 2019 alone. Even while the economy slowed somewhat, manufacturing went into decline, and the earnings of the S&P 500 almost certainly ended 2019 down slightly year-over-year.
Without laboring the market’s course over the entire year, it was in essence a sequence of three important forays into new high ground. First, it made up all of 2018’s drawdown, and broke out at the end of April. It then corrected sharply, about which I’ll have more to say in a moment. Another series of new highs followed in June-July, and consolidated into the fall. The third and most dramatic breakout took place at the end of October thru to year end.
These three successive waves of new highs seem to us to have attended upon a slowly growing realization that widespread fears of major disaster—trade wars tipping the economy into recession, a significant year-over-year downtick in earnings, and a constitutional crisis regarding impeachment—were overblown. This was particularly true, I think, with respect to the late October breakout and the virtual melt-up that followed. That upswing was ignited by a third quarter earnings decline that proved far milder than almost anyone had forecast, and not one but two successive blowout monthly jobs reports.
With all of those rather dry facts out of the way, I’d like to return to the above-mentioned May-June drawdown, which lasted about a month, and took the S&P 500 down about 7%. Technically, this can’t even be classified a “correction,” as the Index didn’t close anywhere near 10% down. It was, nonetheless, a full-blown panic attack, set off by one of President Trump’s most bellicose tweets regarding China.
It is the way investors reacted to this relatively brief, relatively shallow drawdown which captured our attention, and which we commend to yours. Simply stated, net liquidations of U.S. equity mutual funds and ETFs—absolutely, and especially contrasted with bond fund inflows—soared to levels not seen since the Great Panic of 2008. We repeat: a one-month, 7% drawdown set off a flight from equities consonant with the existential financial crisis of our time.
Set aside momentarily, if you can, the headline issues of the day: the trade situation, an aging economic expansion, impeachment/election uncertainty, and the like. These are not merely imponderable; they’re irrelevant to long-term, goal-focused investors like us.
Instead, we would invite you to focus on what seems to be the default setting of the investing public, which we would describe as pessimism verging occasionally into sheer panic. All our reading and experience suggest that very meaningful market setbacks have not historically occurred during huge waves of public pessimism and fear. Quite the contrary.
This is not to be taken as any sort of market forecast (as we’ve said repeatedly, we are planners, not prognosticators). It is simply an invitation, as we look into the new year, to take some comfort from the rampant fear abroad in the land, even after a decade and more of stellar returns. There will be plenty of time to begin worrying when the stock market once again becomes cocktail party conversation, and everyone around us is excitedly bullish.
Be of good cheer. It is overwhelmingly probable, as financial journalism has been shrieking of late, that 2020 will not match the returns of the past year. Few year