After a dismal start, equity markets soared during Q4, thanks to an improved economic picture, alleviated trade tensions and reduced fears of recession, with the DJIA, Nasdaq and S&P 500 showing quarterly gains of 6.0%, 12.2% and 8.5% respectively.
Q4 capped out a year of unexpectedly high performance. We entered the year with investor concerns over the US-China trade war, weak global growth and the Fed’s tightening monetary policy. In fact, December 2018 marked the worst December for the DOW and S&P since 1931. And Wall Street was bracing for a looming recession.
Looking back, we saw a low risk of inflation, with an improved job market and wage growth. We noted in our Q4 2018 summary that As we begin 2019, the US economy remains strong, with solid economic growth and strong corporate profits. We entered the year as we always do, with a continued focus on fundamentals, adhering to our long-term plans without diversion from short-term reactions. And, what a year it was, with the stock market locking in on its best performance in twenty years.
Heading into the new year, most economic indicators remain positive.
- Gross Domestic Product (GDP). The GDPNow model estimate for real GDP growth (seasonally adjusted annual rate) in the fourth quarter of 2019 is 2.4%. Real GDP increased at an annual rate of 2.1% in the third quarter of 2019, according to the “third” estimate released by the Bureau of Economic Analysis. In the second quarter, real GDP rose 2.0%.
- Unemployment. The unemployment rate was little changed in November at 3.5%, a fifty-year low.
- Consumer Confidence. The Conference Board Consumer Confidence Index, which gives an indication of consumer attitudes and buying intentions, stands at 126.5, up from the previous quarter end’s 125.1, but down from August’s 134.2. Overall consumers maintained a positive outlook, according to the survey conducted by Nielsen.
- Consumer Price Index (CPI). The CPI for All Urban Consumers (CPI-U), a measure of inflation which shows “cost of living” fluctuations, rose 0.3% in November, on a seasonally adjusted basis, after rising 0.4% in October. For 12 months ending November, the CPI-U increased 2.1% before seasonal adjustments.
- Earnings. The estimated (year-over-year) earnings decline for Q4 2019 is -1.3%. If -1.3% is the actual decline for the quarter, it will mark the first time the index has reported four straight quarters of year-over-year declines in earnings since the period from Q3 2015 through Q2 2016. The estimated (year-over-year) revenue growth rate for Q4 2019 is 0.3%
- Housing. Privately-owned housing starts in November were up 3.2% from October and 13.6% above November 2018. Builders confidence in the newly built, single-family home market jumped 5 points in December to 76, the highest reading since June 1999. Existing home sales and prices also increased.
As we enter the decade on an economically positive note, with a fundamentally sound domestic and global economy, we recognize that markets will continue to face old and new risks. The results of the 2020 elections will certainly have an impact and pose a risk of significant changes in tax and monetary policy. And, as we have recently experienced, unexpected events can cause shock waves in the market (case-in-point US/Iran tensions), resulting in anything from a bump in the road to a deeper pullback. In addition, after 2019’s historic run, stock prices are starting off the decade relatively expensive.
Overall, we remain cautiously optimistic and anticipate continued growth -- albeit slower, and positive market performance -- though not likely to match that of 2019. And as always, we hold fast to our long-term investment strategy, focusing on fundamentals and serving in a fiduciary capacity where you, the client, always come first.
We are continually faced by great opportunities brilliantly disguised as insoluble problems.
Lee Iacocca (October 15, 1924 – July 2, 2019)
December 31, 2019
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The views expressed represent the opinion of Asset Management Financial Solutions, Inc. (“AMFS”) and are subject to change and are not intended as a forecast or guarantee of future results. This material is for informational purposes only. It does not constitute investment advice and is not intended as an endorsement of any specific investment. Statements of future expectations, estimates, projections, and other forward-looking statements are based on available information and AMFS’s view as of the time of these statements. Accordingly, such statements are inherently speculative as they are based on assumptions that may involve known and unknown risks and uncertainties.