According to the United States’ master clock keeper, the U.S. Naval Observatory, 2019 was not the last year of the decade. Another reputable calendar resource, The Farmers Almanac, takes the same position. For these official sources, decades are completed with years ending with “0” and begin with years ending with the number “1.” For most everyone else, 2019 was it. Happy New Decade!
Regardless of the calendar semantics, the year was an emphatic end to a rewarding ten-year period for stock and bond investors. Up 31.5%, the S&P 500 had its best year since 2013. The index’s ten-year annualized return was 13.6%, which is well above the average price return of 8.3% since the inception of the 500 stock index in 1957 or 10.2% when the index originally began in 1926 with ninety stocks. The MSCI All-World Index, which is comprised of approximately half U.S. and half non-U.S. stocks, returned 26.6% this year. Hindered by non-U.S. stocks, which have now lagged in 8 of the last 10 years, the All-World index’s ten-year annualized return is 9.4%.
Nashville “Unicorns” (a.k.a. the locals) speak of a time when the city experienced all four seasons, including more than a mere dusting of snow in winter. With temperatures in the 90s throughout September, and no measurable rain for over thirty days, a return of this four-season ritual any time soon seems improbable.
Of course, consternation for the Nashville weather is short-lived when reminded of the destruction of Hurricane Dorian, which made landfall in the Bahamas on September 1st. The Category 5 storm left many dead and missing. It will take years to rebuild and the topography has been changed for generations. While of limited solace to Dorian’s victims, the quick and generous response to this tragedy is a reminder that people are charitable, even amidst today’s rapidly changing economic and social landscape.
What season lies ahead for investors is unclear. It should be eventful considering the recognized near-term obstacles, let alone, the long-term. Thus far in 2019 markets have proven resilient. The S&P 500 and MSCI All-World indices are up 20.6% and 16.2%, respectively. As a result, stock investors have recouped the fourth quarter losses of 2018 and then some. Thanks in part to the third quarter rally, bonds are up too with the Barclays Aggregate Bond index gaining 6.4% year-to-date.
That’s right. Bonds and stocks are both posting big gains this year. It’s like a deep snow in Nashville. It can happen, but it’s unusual.
With both the Southeastern Conference regular season and tournament titles in hand and a record thirteen major league draft picks on the roster, most baseball pundits predicted Vanderbilt to win the College World Series last week. While a Championship is never a forgone conclusion, picking Vanderbilt to win was the experts’ safe call. Exiting a tough May and facing the markets’ seasonal summer lull, forecasting the best June for the Dow Jones Industrial Average since 1938 was not the safe call for stock market experts. In fact, few if any predicted the June rally let alone the S&P 500 and MSCI All-World equity indices 18.4% and 16.2% gains for the first half of 2019.
The June and year-to-date rallies are just the latest instances of stock markets confounding most forecasters. For several years now, many have anticipated an end to the economic expansion and bull market. High profile investment websites that survive on “click bait” have been negative for even longer. Since bad news drives more web traffic than good news, we would not expect that to change.
To be fair, there is plenty of material from which to paint a dire picture. We are ten years into a market recovery, approaching nearly the longest economic expansion on record, waiting on a hard or soft Brexit, confronted with Iran attacking ships in the Middle East, negotiating a new trade agreement with China, and looking at a yield curve and bond market that appear to be anticipating an economic recession. Put simply, the landscape and path forward for investors has rarely been so complicated. And we haven’t even mentioned the upcoming 2020 elections, which will be here before we know it.
Not Everything Is So Complicated
On the following pages we discuss the election and a few other topics upon which investors are focused heading into the second half of 2019 and 2020. Perhaps not surprising, we continue to believe owning a healthy amount of U.S. and international stocks makes sense for most investors. If you are uncertain whether you are one of those investors, or how much equity exposure makes sense for you, an update to your financial plan is overdue. Please let us help. Determining the appropriate financial plan to meet one’s long-term goals is part of what we do, and there is no better time to tackle the exercise than while markets are up.
Also in this commentary we’ll take a minute to ponder why even in these divisive times, Americans are excited to celebrate Independence Day and collectively paused on June 6th to remember the heroic D-day efforts of the 156,000 U.S. and Allied soldiers who stormed a 50 mile stretch of heavily fortified French beaches 75 years ago. Yes, there is a lot in today’s world that is complicated. Taking the time to honor the sacrifices and accomplishments of our World War II veterans is not.
Someone recently remarked, “It rained twice in Nashville during the first quarter. The first time was for 28 days. The second time was for 33.” February was particularly sloshy with 13.5 inches of rain, exceeding the previous record of 12.4 set in 1880. Nashville was not alone in breaking records. Throughout the United States, dozens of snow, rain, and heat records were tied or broken.
This weather maelstrom, a government shutdown, ongoing trade tensions, and a Brexit mess, have likely depressed first quarter U.S. and global economic activity. We’ll soon know more as companies begin reporting first quarter earnings and the government’s economic data estimates are released. In March, we learned the U.S. economy grew just 2.2% in the fourth quarter versus an initial 2.6% estimate. The trillion dollar question is whether this growth slowdown is temporal or if it portends a coming end to the second largest economic expansion on record.
2018 is the first year for tax filers to be impacted by the 2017 Tax Cut and Jobs Act (TCJA). This law included many changes affecting business and individual filers. For individuals, some of the more significant changes included increasing the standard deduction while limiting how much mortgage interest (for new mortgages) is deductible. It also limited the amount of state and local taxes one can deduct on their Federal taxes. We recommend consulting with a tax advisor to understand what the TCJA means for you. With these big changes, we think this tax season will be one to remember for professional preparers and filers alike.