Hello New Year!
Mark Lazar’s January 2020 Newsletter
You don’t stumble into the future; you create it, starting today
What a difference a year makes. Unlike 2018, when markets finished negative virtually across the board, 2019 surprised to the upside—in a big way. Investors were richly rewarded, with equities finishing up generally between 15–30%. Even bonds had a banner year.
Recent headlines were a mixed bag:
⦁ The House passes articles of impeachment.
⦁ Boris Johnson is reelected as UK’s prime minister.
⦁ Brexit is moving ahead; the UK will leave the EU at 11pm on January 31.
⦁ Hostilities between the US and Iran escalated to a boiling but, but war was averted.
⦁ US Christmas sales increased 3.4% YOY
⦁ The US is in its 127 th consecutive month of economic expansion—the longest in history.
⦁ US household wealth is the highest in recorded history, increasing 82% over the past decade.
⦁ Phase One of the US-China trade deal is complete, the USMCA was approved by the Senate, and additional trade deals are with Japan, South Korea, and Mexico are in the works.
|S&P 500 Return YTD
|Bond Index Return YTD
|Foreign Index Return YTD
|Emerging Market Index YTD
|U.S Forecast GDP 2020
*All hyperlinked data as of 1/8/2020
2019 gave investors a lot to fret about; impeachment proceedings, Brexit, UK elections, US/Iran meltdown, trade wars, PGE bankruptcy, and Boeing’s 737 debacle, just to name a few. But none were able to curtail the longest bull market in US history.
Investors often wonder what drives the stock market? How can there be such potentially calamitous events and yet the market does little more than yawn, if not move higher? It’s important to remember what a market is: a pricing mechanism. Every second of every day, millions upon millions of data points—retail sales, employment data, tax policy, trade policy, weather events, geopolitical events, Fed policy/interest rates, etc.—affect security prices. The stock market doesn’t care about Democrats or Republicans. It doesn’t care about political rancor in Washington. It doesn’t care about CNN or Fox News headlines. What it does care about is what or how these factors ultimately affect the earnings per share of Coca Cola, Apple, Wal Mart, or Bank of America … if it affects them at all.
While hostilities between the US and Iran could certainly have had potentially disastrous consequences, Mr. Market—meaning hundreds of millions of investors, including individuals, institutions, and even central banks, from around the world—evaluated the situation as it was unfolding and correctly forecast the outcome would have little to no adverse impact on stock prices.
The same held true for the oil market. Iran is responsible for nearly 5% of the global oil output. Historically, geopolitical incidents involving oil producing countries have had a significant effect on the oil market and, consequently, gas prices. However, as the chart below clearly illustrates, oil prices rose a meager 7% from the start of the war drums to peak, before falling 15% in the following few weeks.
Markets are long-run efficient, but in the short-run, are subject to the same emotions as individual investors: herd mentality, panic, euphoria, complacency, just to name a few. The New Year will undoubtedly bring its share of “bombshell” headlines. However, savvy investors understand security prices will always be more volatile than risk-free bank products. They also know they will be rewarded for tuning out the noise and instead focusing on the long-run benefits of a sensible investment strategy.
Mark Lazar, MBA
Certified Financial Planner®