Of all the joyful activities at Christmas time, my favorite is to indulge in special desserts I rarely enjoy during the rest of the year. My all-time favorite dessert, perhaps the most delectable dessert on the planet, are chocolate half-moon cookies from Geddes Bakery in North Syracuse, NY. On that note, this year’s Christmas is going to be extra special for me because my dear friend’s mom sent a box full that arrived this very day! Now, I realize there are countless things about Christmas that are way more important than favorite desserts. Family gatherings, church fellowship, sharing with others less fortunate, to name a few. Nevertheless, my friend’s thoughtfulness was much appreciated. Doing something special for a friend is surely part of the Christmas spirit.

It’s been a joyful year for most investors, as the stock market approaches the end of the year on a high note. Statistically, the S&P 500 hit nineteen new highs during the year, an astounding performance especially in the context of the long list of economic concerns, political frustrations, and social media madness. In what should be a celebratory mood at the end of such a strong year, investors seem anxious about what lies ahead. Is this anxiety warranted? Let’s try to figure that out…

The presidential election is going to take center stage in 2020 and will dominate the news throughout the year. One thing we can be certain of, whichever side has the momentum, the other side will be unhappy, if not downright angry. No matter the eventual outcome, half the country isn’t going to like it. Sadly, I see very little chance for reconciliation, compromise, and unification, given the personalities of the current candidates. Hopefully, someday this will change, but probably not in 2020.

Meanwhile, there are mixed signals regarding the U.S. economy. On the positive side, we are essentially at full employment and wages are rising for more segments of the population than what has been typical in previous economic expansions. Interest rates and inflation remain historically very low. It is not out of the realm of possibility to expect the economy to accelerate once the political scene settles down. At the same time, both China and the U.S. are motivated to reach a substantive trade agreement. At the very least, trade tension shouldn’t escalate, which means corporations can continue to adjust to the new reality, in order to find innovative ways to succeed independent of business growth in China. The resiliency of corporate America is consistently underestimated, and this is one reason the stock market outperformed most forecasts for 2019.

On the negative side, there are three issues that concern me as we approach the New Year. First, virtually the entire move in stock prices was driven by rising Price/Earnings ratios. Essentially, the 30% advance in the market came with zero growth in corporate profits. Accordingly, unless earnings accelerate, it will be very unlikely that stocks will have a repeat performance next year. Second, Congress and the President have shown no signs that they will attempt to reverse the steady climb in the federal deficit. Will this derail the economy, or at least lead to higher inflation and interest rates next year, or will the day of fiscal reckoning be pushed out into the future? That is a critical question, with no certain answer, but ignoring it won’t make it go away, either. Third, the risk of higher taxes and more government control over the economy, should the democrats sweep in the 2020 elections, is disconcerting. In essence, the market will not react favorably to higher taxes and more regulation.

From a portfolio perspective, given the strength in 2019, and the uncertain environment as we approach the New Year, it seems prudent to be a bit cautious. We have already positioned our equity portfolios in defensive mode expecting a more challenging year in 2020.

Two of our senior portfolio managers are retiring at the end of the year. Ted Ake, and Ham Davis have been an integral part of our success and will be greatly missed. We wish them both a healthy and joyful retirement. The rest of our team is excited about what the New Year will bring. I hope that we can embody the true spirit of Christmas every day as we strive to provide each one of our clients the highest level of service. Despite the uncertain and volatile environment, we are confident we can rise to any challenge. In the meantime, we wish you all a very Merry Christmas and a Happy New Year.

Michael Kayes, CFA

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