Fourth Quarter Review

Global equity markets closed out the year in rally mode.  Bonds were mixed, with yield curves steepening both here and abroad. Most commodities, such as oil and copper, rose sharply while precious metals rested after gains earlier in the year. The U.S. dollar weakened late in December to close the year little changed. Meanwhile, the British pound appreciated as results from the quickly called general election produced a majority government.

Some Positives to End the Year

A number of factors helped the market to advance. A mid-December “Phase 1” trade treaty between the U.S. and China covered the latter’s purchase of $50 billion in American agricultural goods along with energy and other goods. In exchange, thecartoon U.S. agreed to reduce tariffs up to $360 billion in Chinese goods and cancel planned tariffs on another $156 billion in Chinese imports.

As a result of the British election, there is now more clarity regarding Brexit and the U.K. departure from the European Union. Although negotiations between the two sides could last a while longer, the three-year impasse has now ended and a clearer path forward will help companies worldwide with their capital spending plans.

Meanwhile, the state of the American consumer is good (close to 70% of our GDP). Unemployment is near 50-year lows, wages are picking up and personal savings is at 8%, a level not seen sustainably since the early 1990s. Also, the Federal Reserve has lowered its rate three times since early summer and announced it will be on hold for most, if not all of this year.

Some Thoughts About the New Decade

In our view, the current investment and economic paradigm featuring the U.S. as the global leader should continue for the next several years.

Other markets may experience short-term rallies but several in the developed and emerging countries will continue to lag over the longer-term, largely due to unfavorable demographics.

Indeed, nations such as Japan, South Korea, Taiwan, China and many in the Eurozone face significant headwinds to economic growth due to populations that are already falling or will be declining. The U.S. will face headwinds of its own, especially in the area of entitlement reform (such as Medicare or Social Security). The predicament will become acute after several years, assuming that in the interim Washington continues to dither.

In today’s more polarized political environment, the few issues that have bipartisan appeal should gain more prominence in the next few years.

One of them is the idea that “free” trade is good. Trade spats with our North American partners and China may be a prologue to increased tensions with Europe and other regions of the world. Also, the Eurozone has its own trade dispute going on with China, and Brexit will probably lead to a realignment of trade blocs.

Another important issue concerns technology as a double-edged sword: Privacy invasion, “fake” news and possible monopoly power tend to counter technology’s benefits to society. At some point, it seems likely that increased regulation is coming to the tech world, although it is unknown at this time what form or to what extent this will take place.

Other issues, such as health care, wealth inequality and climate change will become increasingly important, although a bipartisan consensus on solutions to each does not currently exist.

The Outlook for 2020

On a short-term basis, the market is overbought and valuations, though not extreme, are no longer inexpensive. Geopolitical risk with heightened tensions between the U.S. and Iran has the potential to cause market volatility. In addition, a number of economic programs proposed by some of the 2020 presidential candidates is causing uneasiness among investors. But it is still a long way to November and almost anything can happen between now and then.


  • In spite of near-term concerns, we are constructive on the market and believe that the longer-term equities bull market that began in 2013 will continue.
  • Despite good asset returns last year, many investors were unhappy, reflecting in part that many people still have limited exposure to equities more than ten years after the Great Recession. This sideline money seeking to find its way back into the market should temper any pullbacks.
  • The excesses that manifest themselves near the end of an economic cycle are largely absent because of the subdued 2-2.2% growth rate of real GDP during this expansion.
  • Finally, keep in mind that the Fed is now a tailwind to the economy instead of a headwind as it was until last summer.