“Be respectful of words. They mean something”-Katherine Anne Porter
The stock market return was better than average in 2019 and many clients with whom we have spoken are wondering what to expect in 2020. Investing in the stock market involves uncertainty so providing a concrete answer is impossible. However, we do gain perspective by relying on our analyses of the businesses we own and the comments of management teams. In this quarterly update we’ll review the factors that helped the market returns of 2019 and we’ll share some of the data points we’ll be watching as the New Year matures.
We have completed one of the strongest years for the market in decades with the S&P 500 up 31.5% including dividends. It is important to remember when evaluating the market return that it was affected by the 2018 fourth quarter sell off. At that time, the brewing China trade war was hurting economic activity and drove the S&P down 14%, pushing the market into negative territory for the year. If one looks at the stock market return compounded annually over the last two years, it has risen 12.1%, a number that is much more temperate. Additionally, the Federal Reserve reversed its tightening policy and lowered interest rates twice in 2019. The old adage “Don’t fight the Fed” proved true once again. We have written in our 2019 quarterly client notes that a significant factor influencing the economic outlook involves removing the uncertainty created by trade war and tariffs. Now that the first phase of the trade discussions has concluded, we are hopeful that the issue will be less of a factor.
On the economic front, the outlook in the United States remains one of slow growth. The GDP is likely to slow from 2.2% in 2019 to 2% in 2020. We are hopeful the near-term resolution of the China trade war may favorably impact economic growth. According to the International Monetary Fund the global growth forecast in 2020 suggests Global GDP should accelerate from 3.2% in 2019 to 3.5% in 2020. The outlook for international economic growth will be a contributing factor to the extent the US economy exceeds 2% growth. While recent manufacturing data has been mixed, there continues to be signs of strength in employment and in the service industries.
We think the valuation of the stock market and the upcoming election cycle are the next most important factors to consider. Regarding the stock market valuation, the S&P 500 is currently trading at an 18.7x forward P/E multiple. Over the last ten years the valuation range has been between 21x and 13.5x, indicating the market is trading toward the higher end of its historic range. This suggests that, for the market to have another strong year, corporate earnings forecasts will need to rise. Bonds, with a 10-year treasury yield of 1.82%, remain less appealing to investors interested in total return. When the election cycle kicks off on Super Tuesday, the field of Democratic competitors will narrow, and the frontrunners will become evident. It will be interesting to see whether a moderate or more progressive candidate is selected by the Democrats given the radically different economic policies either faction embraces.
Finally, we’d like to report on the progress being made integrating WJR Financial and Ayrshire Capital Management. From a strategic standpoint the merger has been seamless and we enjoy working and conducting our research together. Operationally, we have moved to a new portfolio management system that offers better client reporting and we think you’ll appreciate the changes. Thank you for entrusting Ayrshire Capital with the management of your money. We look forward to speaking with you in the coming quarter.
JM Sam Nevin, Jr.
W. Joseph Ryan III
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