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2019: An Unexpected Result

| January 22, 2020
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2019:   An Unexpected Result

Wow – great year!  But do you remember how we felt in January 2019?  Investor sentiment was quashed by a -9.2% correction in U.S. stocks in December 2018, and the anti-growth political events of the day; a partial government shutdown and the growing China-US tariff dispute.  The throngs of investors sounding the alarm were many. 

Defying this negative sentiment, the S&P 500 (SPX) gained +7.87% in January of 2019 - not unexpected coming out of a year-end rout.  But according to our client discussions, few investors believed that the market could climb the prevailing “wall of worry” to deliver much more in the way of gains for the remainder of the year.  So, when January’s gain was followed up with an additional +10% advance February through April, a degree of skepticism set in.  The -6.86% pull back in May seemed merited and was perhaps the negative confirmation that doubters were looking for, yet U.S. stocks (SPX) produced a total return of +28.8% for the full year – amazing. 

Make no mistake, we do believe that the market is over-bought, over-extended, and fueled by expectations that are unlikely to fill in quickly enough to avoid a correction.  We also believe that taking some risk off the table at these levels is a prudent move.  Nevertheless, there are lessons regarding investor discipline to be learned from the market’s resilience in 2019: 

  1. Market timing rarely works to your benefit. Economist William Sharpe calculated that a market timer would have to be correct 74 percent of the time – on both the market decline and recovery – to outperform another investor who just lets their money sit in the S&P 500. 
  1. Rather than being too predictive, plan for both bull and bear markets so that you can stay fully invested through both. Market timing relies on speculation, which leads to much higher monthly standard deviations, which leads to more extreme outcomes.  Consistency is better. 
  1. It is important to remain invested so that you don’t miss the market’s best days – which have a profound effect on future returns. Putnam Investments tracked a $10,000 investment in the S&P 500 from 12/31/2003 – 12/31/2018, a period that includes the financial crisis.  The results, according to different holding patterns, are as follows; 
  1. Stayed fully invested = $30,711
  2. Missed 10 best days = $15,481
  3. Missed 20 best days = $10,042
  4. Missed 30 best days = $ 6,873 
  1. Investors invest in companies, not in the economy and not in government bodies. Publicly traded companies have rising cash flows, for the most part, of which they are fiercely protective.  Yes, there is volatility in the pricing of these cash flows - but this is the trade-off for growth. 

A fantastic year is often falsely correlated with improving economic fundamentals, and at times the market can be wrong in terms of direction or degree.  But 2019 delivered tremendous capital appreciation, so the “why?” and “how?” seem less important.   Our task now is to use this excess return to make your portfolio more stable for a period in which positive returns are harder to achieve. 

 

These are the opinions of Charles Dear and not necessarily those of Cambridge, are for informational purposes only, and should not be construed or acted upon as individualized investment advice. Indices mentioned are unmanaged and cannot be invested into directly.

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