A ‘melt-up’ into early 2020 looks very realistic. But then what?
As 2019 ends and 2020 begins, here are some quick observations that I hope will help you stay balanced in your approach to equity investing. As it turns out, there are real reasons to be bullish on stocks…for a little while, anyway. However, if you are within 10 years of retirement, or already retired, you can’t just look at it that simply. Here’s why.
A case of mistaken identity
In investing, their are bulls, bears and realists. I am the latter, and you should strive to be too. Despite trying to take an investing approach that weighs the evidence at all times, I am often confused with one of those “perma-bears.” You know, the investment commentators who never have anything nice to say about the future direction of the stock market. No matter what the news, they find a way to bring down the happy mood of all around them. While it may sometimes seem like it, I am not that.
2019: can it get any better?
2019 was a great year for the stock market. Most market segments were up, and a dive in interest rates helped bonds too. Happy times.But the proverbial die was cast for 2019 before it even started. You may have missed it, but last holiday season, the S&P 500 fell nearly 20% during the 4th quarter. Over 15% of that move took place over 3 hazardous weeks in December.Then, Santa came and brought the rally with him. The stock market bottomed on Christmas Eve, and surged into the new year. That last-minute surge in late December brought the S&P 500 back so that its return (including dividends) was down about 4.5% for all of 2018. If not for that rally between Christmas Eve and New Year’s Eve 2018, the S&P 500 would have ended down 10.5% for the year. That’s where it was on Christmas Eve. How soon we forget.That rally has been going for about a year, with nothing more than a speed bump during that time. That has revived the so-called “animal spirits” on Wall Street. As a viewer of markets and money from multiple angles (economic, geopolitical, quantitative, etc.) I see plenty of reasons for concern.
Then, the “dang realist” entered the room…
However, as a realist above all else, we all must account for what is happening as 2020 begins. Specifically, the “stock market” does not care what the risks are. Price is king and queen. So, until the aforementioned concerns become broad-based enough to drop prices significantly, the S&P 500 Index can keep climbing. This is somewhere between two old Wall Street sayings:
- “The market climbs a wall of worry”
- “The market can keep rising longer than you can remain solvent”
- That latter quote is aimed at the perma-bears. And, with some strong bullish technical signals firing a couple of months back, it became obvious that the good tidings of 2019 were not going to end until at least some time in 2020…or later.
The realist’s manifesto (continued)
In investing, conditions are never as good or as bad as they seem. This natural tendency of the human mind explains a lot of the long-term swings between over-valuation and under-valuation. It is also why we are more likely to get years like 2019, when the S&P 500 went up over 25%, and years like 2008, when it dropped over 35%, than a series of 8-10% years as some would have you believe with long-term average stock market returns.When conditions seem dire to the general public, it is natural for we realists to look for silver linings. Likewise, when things look great, we look for sources of concern. As 2019 closes up shop, here is one concern that should be front-of-mind for all stock market investors: the S&P 500 is behaving a lot like it did entering the years 2000 and 2007.The 1999-2000 period
First, here’s a look at the 4th quarter of 1999, and the first quarter of 2000. This was the final rally that led to the busting of the dot-com bubble. Who would have even considered that a 17% gain in the S&P 500 in under 6 months would be followed immediately by 3 years of generally falling stock prices. And, that the S&P 500 would lose nearly 1/2 its value over that time? Who would have even considered that? Realists, that’s who!
Next, let’s look at late 2006 into 2007. 2006 ended a lot like 1999 and 2019 did. The market surged, and carried that warm and fuzzy feeling into early 2007. Even a dip in February proved to be just another buying opportunity. That is, for a few months. By the autumn of 2007, it was more obvious that the financial system and the health of corporations were overstating where market prices were. Within 18 months, the S&P 500 lost 1/2 its value, again.
Now, we come to the current market. Long-term uptrend? Check. Reasons for realists to raise concerns? Check. Investors too busy watching their account statements rise each month to notice? Check. The S&P 500 was up nearly 10% for the 4th quarter through Christmas Eve. This is clearly not 2018. But is it 1999, or 2006? Or, is all of this just a warm-up for another big year for stocks in 2020?
Of course, I don’t know the answer to that. No one does. All we can do is manage risk, and look for opportunities to get our fair share of bull markets. That’s what I try to do, anyway.
What to do now?
Strategy-wise, I will have much more to say about this specifically in the new year. For now, suffice it to say that as 2020 begins, your best move is to be thankful for 2019, look for ways to avoid giving back the gains of the past decade, and learn ways to exploit what is likely to be a volatile U.S. election year.