Christmas 2018 was a dismal one for stock market investors. Meagre gains eked out through a volatile year were reversed at its end, on fears of slowing global growth and all-out trade war between the US and China. The S&P 500 tumbled by 15% between November 30th and December 24th that year. Traders thought a recession was imminent.
Such fears proved overblown. The S&P 500 rose by 28.9% during 2019, well above the average annual gain for the past decade. December is often good for market, with the index rising by a record 2.9% this year. Markets beyond the US also did well. The FTSE All-World, a global index, rose by 24% in dollar terms, its best showing since 2009.
The MSCI All-World equity index only recently surpassed its early January peak from 2018. That shows how the bruising two-year trade battle between the US and China, alongside political drama in the eurozone and UK, has essentially been accompanied by global equities trading sideways. This is not the full picture. The S&P 500 has risen more than 10 per cent beyond its early-2018 peak, reflecting the dominance of its tech titans. Next, Europe with the STOXX 600 having taken out its 2015 record high, while the MSCI Emerging Market equity index remains about 15 per cent below where it was trading two years ago.
The potent combination of monetary easing and evaporating risks to growth seems largely played out. Shifting from trade hostilities to a ceasefire had a big impact; any further rapprochement is unlikely to do so much. Meanwhile neither the Fed nor independent economists are forecasting interest-rate moves during 2020.
Economists predict that growth is also less likely to provide a tailwind. In America and globally, growth slowed a little during 2019 and is likely slow further in 2020. Profit upgrades are therefore unlikely. And investors are already paying dearly for stocks. The “earnings multiple”—share prices as a multiple of profits—is steep, at 21.6 for the S&P 500, far above the long-run average of around 16.
Traders, on the other hand, are now expecting a rebound in global economic activity in January, spurred by a recovery in business sentiment and investment. Central bank policy easing over the past 12 months has helped counter the drag inflicted by a trade war and a moderating Chinese economy on global activity.
Buffeted between these views and market swings, what is the long-term investor to do?
First, stay invested and remain diversified;
Second, review your positions and determine whether the original investment case is still valid and still meets your goals; third, depending on your risk profile and view on the economy, select stocks with sustainable dividend payments and/or disruptive companies that are riding the next ‘big thing’ such as biotech, Internet of Things, Cloud computing, the car of tomorrow, etc. where growth is likely and short-term volatility certain;
And lastly, call us.
Always keep in mind that we will have pull-backs when the markets surge and potentially overshoot. Be ready to pounce.
We wish you a successful 2020 and we are happy to discuss your 2019 performance with you.