What a Difference a Decade Can Make!

R ENAISSANCE V IEW

Stock market returns for 2019 ended the decade with a bang! The S&P 500 Index rose +28.9% last year and had a total return (with reinvested dividends) of +31.5% ⁱ . Is it ironic (or perhaps just confounding) that returns were strong last year despite earnings being down v. the prior year? Further, how do you explain that stocks were down -4% in 2018 when earnings that year were up +23%? The answer to both questions is that the market is forward-looking. Stocks fell in 2018, because the earnings picture for 2019 was pretty dismal on a year-over-year basis, especially with the uncertainty of the effects of a continued trade war. Then, 2019 returns were strong as the earnings picture was expected to improve into 2020, and the trade war is expected to slow but not stall earnings growth. Speaking of which, perhaps an earnings picture will help…

As you can see, earnings growth is expected to bounce back in 2020 and even into 2021 (we’ll deal with 2021 later) ⁱⁱ . For now, an improving earnings scenario, U.S. GDP growth of +2.3% in Q4’19 ⁱⁱⁱ and estimated growth of +1.9% ^iv in 2020 (slightly higher than that globally ^v ), are positive backdrops for owning stocks. In addition, the consumer is healthy from both a balance sheet and spending perspective, and unemployment is low. Those conditions combined lead us to believe that the next recession is not on the near-term horizon. Being fully cognizant that we are somewhere in the second half of this economic expansion, however, we monitor the changes in these economic conditions in addition to changes in the yield curve to help anticipate when more caution is warranted. For now, fundamentals say we should not be afraid to own stocks.

Now for our words of caution. With higher stock prices have come higher valuations. The forward Price/Earning (p/e) ratio for the S&P 500 is 18.2x ^vi , which is above long-term averages of 15-16x. So, while we could conceivably see more p/e multiple expansion, you could argue that future stock market returns may be more in line with earnings growth. And given the run we’ve seen, that wouldn’t be too shabby.

Speaking of the run we’ve had; a brief recap may provide some needed perspective to all of us as a reminder of why we take a long-term view as stock investors. The S&P 500 Index last decade averaged +13.5% annual total returns. The decade prior, -1.0%. The one before that, +18.1%. Yes, you’re reading that correctly…

Decade Annual Return ^vii

‘10s +13.5%

‘00s -1.0%

‘90s +18.5%

Getting invested and staying invested remains a simple and solid approach for long-term money. Many investors are looking back in amazement and perhaps regret, as they still recall how they felt during the ’08-’09 financial crisis and reacted with that emotion. It was difficult then, however, to look forward as the market does, and conditions at that time clouded for many the potential of this recovery.

Switching time horizons, shorter-term money should generally lean more toward a balanced or fixed income approach, which provides less volatility, and possibly less return, but focuses more on capital preservation.

Regarding fixed income, it appears the Fed is on hold for now with its interest rate policy. Fed Funds futures indicate a less than 10% chance that the Fed changes rates either higher or lower in the next 3 months ^viii . The economic conditions outlined above are fairly healthy but are not strong enough to warrant raising rates, nor are they weakening at this time enough to lower rates. We feel a combination of short-duration, intermediate, multi sector, and high yield bonds are appropriate for most fixed income objectives. Of course, your individual goals and objectives are what matter most, so talk to your advisor about what is best for you.

We are happy with recent market returns, but we continue to look forward as well and should not take the markets for granted… and that is a resolution that shouldn’t be broken.

Happy New Year!... and as always, thank you for letting us help you strive toward your financial goals!

Gary Orf, CFA ^® | Chief Investment Officer | Renaissance Financial

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ⁱ Bloomberg, January 2, 2020.

ⁱⁱ Zacks Investment Research, December 13, 2019.

ⁱⁱⁱ Atlanta Fed GDPNow, December 23, 2019.

^iv Chicago Fed Letter, December 2020.

^v JPMorgan estimates, December 2019.

^vi JPMorgan estimates, December 2019.

^vii Bloomberg, January 2, 2020.

^viii Bloomberg, January 2, 2020

The S&P 500 Index is an unmanaged index of 500 stocks that is generally representative of the performance of larger companies in the U.S. Please note an investor cannot invest directly in an index.

Neither diversification nor asset allocation guarantee against loss, they are methods used to manage risk.

Investments in fixed income securities are subject to the creditworthiness of their issuers and interest rate risk. As such, the net asset value of bond and real estate funds will fall as interest rates rise.

This material represents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. This information should not be relied upon by the reader as research or investment advice regarding any funds or stocks in particular, nor should it be construed as a recommendation to purchase or sell a security. Past performance is no guarantee of future results. Investments will fluctuate and when redeemed may be worth more or less than when originally invested.

Securities and investment advisory services offered through Securian Financial Services, Inc. Member FINRA/SIPC. Renaissance Financial is independently owned and operated. 5700 Oakland Avenue, Suite 400, St. Louis, MO 63110

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