Winter 2020 Commentary

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Outlook

For the year, the S&P 500 posted an incredible 31.5% gain, which is the best annual return since 2013, when the index gained 32.4%. Prior to that, you have to look back to the heady days of the tech bubble to find a similar result. So, last year’s rally was impressive, to be sure.

2019 began with a dramatic jump in the first quarter with the S&P 500 returning 13.7%. The summer and fall saw a return of market volatility and more moderated gains for the index of 4.3% and 1.7% respectively. In the fourth quarter the market stabilized and finished the year strong with a 9.1% gain. The yearend rally began in earnest with the announcement that the U.S. and China agreed on a framework for a partial resolution to the ongoing trade dispute.

When reviewing last year’s strong stock market performance, it is important to consider it in the context of what occurred in the previous year. If you recall, the market suffered a nerve‐ rattling drop in the final months of 2018. The first leg up in this year’s rally can be largely attributed to a “snap back” to reclaim the losses suffered in late‐2018. The graph below helps illustrate our point.

Winter commentary SP500

*This graph is not intended to recommend any investment or investment activity.

So while 2019’s gain was impressive (and welcome), we can thank the market weakness in 2018 for a significant portion of last year’s gains. In total, the overall return for the S&P 500 in 2018 and 2019 combined was 25.7%, or an average of 12.1% per year. We aren’t going to com‐ plain about that. In fact, we remain in one of the longest and strongest bull markets in history. Since the end of the last bear market in the spring of 2009, the S&P 500 has gained a total of 451%, or 17.1% per year. It has certainly been a fantastic time to be invested!

This leads to the often asked question of “how much longer can the bull market continue?” The simple answer is that there is no way to know for sure. Throughout the past decade there have been many periods of extreme pessimism, when it appeared that the good times might finally come to an end. Last year was no exception. During the summer, as the trade war with China gained steam, and the yield curve inverted (yikes!), there was an overwhelming consensus that a recession was imminent. Now, following the late‐year rally, there is little discussion or concern of an economic downturn in the near‐term.

Regarding stock prices, we would not consider stocks “cheap” at this point. In relative terms, we look at the price‐to‐earnings relationship of the S&P 500. At current levels the price of the S&P 500 is about 18 times the expected earnings for the coming year. The long‐term average is about 16 times expected earnings. So, it is fair to conclude that stock prices are above average, but they are not wildly expensive. We believe that so long as the economy remains strong (which it is), and stock prices are within a reasonable range of “fair value” (which they are) the bull market has a good chance to continue for the foreseeable future.

While overshadowed by the gains in the stock market, the bond market also enjoyed a profit‐able and interesting year as well. For the year, the Bloomberg Barclays Aggregate Bond Index returned 8.7% which is the best annual return for the index since 2002. Much of the bond market’s gains came as the Federal Reserve switched gears from a bias towards raising interest rates to lowering them. There were two very important consequences that resulted from this shift. The first is that mortgage rates have dropped significantly and remain near historically low levels. The second was the much publicized (albeit very brief) inversion of the yield curve. This has, in past instances, been a harbinger of a looming economic downturn. It is worth mentioning that the yield curve, by the classic definition, was only inverted for a few days and has since steepened back to a much less alarming level.

Heading into the new year, the U.S. economy remains on solid footing. The December employment report showed that unemployment remains at 3.5%, which is the lowest level in 50 years. U.S. GDP is positive with the most recent reading showing 2.1% growth, with expectations that growth will continue through 2020. However, we should continue to expect the un‐expected as we head full bore into the upcoming Presidential election on top of all of the ordinary twists and turns that will inevitably come.

Despite the long duration of the current bull market and the sometimes frequent bouts of volatility, we believe that the U.S. economy remains strong and will continue to grow for the foreseeable future. Under any circumstances, it is important to remain well‐diversified and remember that investing is meant to be a long‐term proposition.

Thank you very much for your continued confidence in our service and advice. If you would like to discuss our opinions, outlook, or your portfolio in greater detail, we would be happy to schedule a meeting or a conference call at your convenience. Lastly, don’t keep us a secret. If you know someone who would like help planning for their financial future, we will be pleased to speak with them to see if we can assist.


Horizon Wealth Advisors is a Houston based fee-only wealth management firm. Horizon is a fiduciary advisor. We specialize in helping successful individuals and families understand, organize, and manage their often complex financial situations. Horizon offers integrated financial planning and investment management services.

Owen Murray, CFA
Owen Murray joined Horizon Advisors in 2005. As a core member of the wealth management team, Owen is principally involved in investment research and portfolio construction.

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