230 North Westmonte Drive
32 years young! The First Financial Companies appreciates you for being a part of our 32-year history. We love what we do, working with our clients to provide quality advice in a manner that we constantly strive to keep simple, understandable and timely. No two clients are the same, which continues to keep our work interesting and enjoyable for the team here at First Financial. Thank you for your continued support, patronage and confidence in our mission to provide you with the best possible advice. We consider it our responsibility to provide each client with personal planning advice, in a responsive manner and tailored to your individual needs and circumstances while considering input you provided to us since you became a client.
As with all markets the cycle continues, 2019 remained noisy (volatile), by the end of December the broad indexes ended the year with returns ranging from nearly 38% (NASDAQ stocks) to sightly under 2% (cash). Looking ahead we suggest the market noise (volatility) is likely to continue, however the underlying economy in the US remains strong. The most recent data reports our U.S. economy, expressed as the U.S. Gross Domestic Product ("GDP"), a key measure of our domestic economy, expanded at a 2%+ annualized rate, for each of the first three quarters of 2019.1 While GDP slowed from its pace the prior year, the investment markets did not. In 2019 the major asset class return results were: Stocks: the benchmark S&P 500 index achieved a total return, with dividends reinvested, of 31.49%. Bonds: Bloomberg Barclays US Aggregate Index 8.72%. The broader market’s technology-based NASDAQ Composite index's total return returned a 37.89% and the measure of the world markets, the MSCI All Country World ex USA Index 21.51%.2
We have no crystal ball, but we do believe, it is more likely than not, the U.S. will avoid a recession in 2020. We don’t see any fundamental reasons that make a solid case for the occurrence of recession other than a military conflict. It is however a presidential election year which could usher in wild-card style market reaction to any significant event such as will occur in November. Looking broadly, the consumer sector continues to remain strong, particularly the tight labor market. The corporate sector continues to be sound, although corporate management teams are continuing to evaluate trade concerns especially with China. We do expect to experience growth in 2020 similar to that we experienced in 2019, but to a still above historical trends at greater than 2% annually.
Long-term interest rates moved up, down and back up during the past year. Ten-year U.S. Treasuries ("10-year"), a benchmark for mortgage and other consumer market interest rates, reached some of their highest yields during 2019, rising above 2.7% in January. As recently as early September 10-Year yields were below 1.5% and ended the 2019 year above 1.9%3, which added to the aforementioned "noise". It wasn’t too long ago (late August) that investors were reading about the inversion of the yield curve. The spread between 10-year and 2-year yields turned negative for four days in August4, sounding the historically indicative recession signal, the event was well chronicled by most U.S. based media as a recession predictor. There is much more to predicting a recession other than an inverted yield curve, which is good reason to not count on the news outlets for financial advice.
As we enter the new year, we continue to be cautiously optimistic that stocks will return positive results in 2020 but investors should always be anticipating the normal corrections of 10% or more. When the financial markets are trending higher, investors become complacent and when the normal cycle of routine corrections occur, they are unsettling to most people. During the market downturn period it is often hard to be more like seasoned long-term focused investors who traditionally ride out the normal storms of investing. We continue to encourage our clients planning to retire in the next several years to focus on accumulating up to 24 months of household expenses set aside in cash reserves (this is after spending quality time preparing a reasonable retirement budget). Why? The theory is, accumulating a cash reserve of 24 months household expenses reduces the anxiety of being forces to sell market sensitive investments during a market downturn.
Clients talk about "the market" and often refer to the indexes, typically either the Dow Jones Industrial Average or the S&P 500 index. Clients want to see their investment portfolio grow the same as, or better than, these indexes. It is not prudent, and nearly impossible, to remain 100% invested in equity (stock) category investments. And, the truth is, no one can consistently predict the number one investment category in which to invest and investing in an index virtually assures you of achieving the index average's return. It is increasingly important to diversify your investments, especially for those investors nearing the end of their accumulation years and moving into the decumulation period of their investing lives. Therefore, diversification across asset classes remains important because truly no one ever knows which asset class will be the winner this next year. And diversification traditionally assists in reducing the "noise" of major market swings on your portfolio. Keep in mind, diversification doesn't eliminate risk, and there is no guarantee against investment loss, but it is an important approach to reduce large swings in value, in either direction, from the different asset classes. And in doing so, assists in reducing investors downside loss. Always remember you can time the market, just not all the time, and therein lies a problem for those that think they can. If you can't take the market volatility and have difficulty with negative market return periods, maybe you shouldn't be invested in market sensitive assets. Think about your own investment allocation and let us know if you want to make a change in your investment strategy.
1 Bureau of Economic Analysis • 4600 Silver Hill Road • Suitland, MD 20746
2 Capital Group Year End Data & NASDAQ 2019 Review
3 CNBC Charts