January 2020
Our team’s commentaries on the market have been consistently bullish over the past several years, and our indicators still suggest that more stock market gains are in store for 2020. When there was much talk of a coming recession last summer, we said unequivocally that there would not be one in the near term. When the market made a new high in late October, we wrote that the market was healthy, new highs were in store, and that we might even experience a market “melt-up” into the end of the year. The S&P 500 rallied 6.28% from the new closing high on October 28th through the end of the year. The same process that guided us to those conclusions remain positive on the stock market into 2020.
The drivers underlying our thesis have not changed. The top ones are: 1.) a solid domestic economy powered by an exceptionally strong consumer, 2.) data suggesting international economic growth will reaccelerate 3.) an accommodative Fed, 4.) healthy credit markets, 5.) supply/demand trends within the stock market itself confirming that the market is on solid footing. Combine these indicators with the fact that valuations are low relative to bond yields, and the persistent negative sentiment among average investors (a contrary indicator), and we see no evidence that the market has reached its peak yet.
However, given the speed of the market advance over the past few months, we acknowledge that some profit taking is likely in the near term. It is probable that one's asset allocation has drifted somewhat as stocks have increased in value faster than bonds. We are re-balancing back to an appropriate allocation for most of our clients.
Note that when a pullback inevitably arrives, it will be because of some alarming news item; perhaps a disappointing economic report, geopolitical unrest, or tumultuous domestic politics. Often the reason for a pullback is simply an excuse. If that event had not occurred, then something else would have been used as a reason for a market sell off. The truth is that, like ocean tides, the market sometimes needs to retreat in order to advance again. When the market is ripe for a pullback, a reason appears. What is important for investors to do is to focus on objective big-picture indicators like those listed above. As long as our indicators remain positive, we will remain fully invested in US stocks within the context of a client's appropriate asset allocation.
