What a year 2019 has been. Despite trade wars with no resolution, weakening economic data, geopolitical uncertainty, impeachment, Brexit, and a whole list of other potential negatives, markets across the globe were strong and had very little volatility. In this issue, we review the key charts that help explain a very interesting 2019.
“Learn from yesterday, live for today, hope for tomorrow. The important thing is not to stop questioning.”
Charts of the Year
As the year comes to an end, it is customary to review everything that happened and attempt to put things into context. While we will not review the entire year, we do think some major themes emerged from this year that could give us clues as to what may be in store for next year.
Most importantly, we think reviewing the year allows us to better understand bigger trends and potential changes that may appear in the coming months and years. That said, you will not find predictions in our publications, especially this one. In fact, as our interest rate chart further below shows, we view predictions as an utter waste of time and effort.
However, we do believe we can enter the new year with a set of expectations on what may come.
As the year began in 2019, the overwhelming feeling was one of uneasiness. The stock market had just completed a sharp 20% decline that took only 3 months to occur. Most people entered the year with a bit of hesitation, and an expectation that volatility would continue. We were no different.
But as happens so many times in life, but even more often in the markets, reality tends to be much different than expectations.
So without further adieu, we present the charts that represent 2019.
Stocks Emerge from 22-month Bear Market
Year-to-Date performance on various assets classes were quite phenomenal in 2019. Stocks were up anywhere from 15% to 40%, bonds were up almost double-digits, and many other asset classes showed strong performance.
However, the important feature of this year was not the numbers themselves. Performance numbers looking back only to January 1st don’t take into account the big drop that occurred immediately preceding the turn of the year.
The most important occurrence in our opinion was that the market went through the 3rd mini-bear market since the 2009 lows, and have only recently broken out of that sideways trend.
The chart above shows the S&P 500 Index since the 2009 lows. There have been 3 sideways markets that were almost identical in length. In each, prices fell almost the same amount as well, each one falling roughly 20% from peak-to-trough.
It has only been two months since we broke out of this range. So despite a very strong year, the market could have much more room to run higher in the months ahead.
Long Term Charts Look Similar to the 10-Year Chart
While not necessarily representative of 2019, it is interesting to view just how similar long-term charts can appear to shorter-term ones. The chart below shows the S&P 500 index (and stock data representative of the index prior to its inception) since 1880. Yes, this is a 140 years of stock market data.
Look familiar? Stocks moved in almost an identical fashion over longer periods of time as it did over the past 10 years.
This type of behavior, where shorter-term patterns repeat on longer-term time frames, is called a “fractal”. Fractals appear all across nature. The spiral pattern of a seashell very closely resembles the shape of a spiral galaxy. Same pattern, very different scales. The same applies to financial markets.
The breakout of this longer-term pattern occurred 5 years ago, and also suggests that we shouldn’t be surprised if markets move higher for longer than we may think is rational.
People Aren’t Very Good at Predictions
For whatever reason, people like to predict the future. And for the most part, they simply aren’t very good at it. This is a theme we have come back to time and again, and it didn’t let us down this year.
The chart below shows the Wall Street Journal’s Survey of Economists as to where interest rates would be at the end of 2019. The best economists in the world were asked to participate in this survey, and represent all the major financial institutions.
The results speak for themselves.
Not only did people miss the actual yield level itself, over 90% of respondents guessed incorrectly on the DIRECTION of the move in yields.
To put this in context, being wrong by 1.5% on the yield of the 10-year Treasury is like missing the final score of a football game by 300 points. It is so wildly wrong that the word “wrong” doesn’t even accurately describe it.
And the are the “smartest” guys in the room.
Let’s keep this in mind as the 2020 predictions start to be announced.
It’s All about the Fed
If you don’t look at any other chart in this report, look at this one. The Fed has started a binge of asset purchases and is flooding the market with liquidity once again. The current rate of increase of liquidity injections far exceeds the pace during the rapidly expanding “QE3” in 2012 and 2013.
The Fed has been the single biggest contributor to the rise in asset prices over the past 10 years. And it is signalling that it wants to keep pushing things higher.
At some point there will be a price to pay for the liquidity that the Fed is injecting into the financial system. But until that day comes, we must be aware what the Fed is doing and not try to fight the effects of its actions.
Yield Curve is No Longer Inverted
Inverted yield curves have been the single best predictor of recessions in the past 100 years. During a brief period of time this past summer, this was THE major development in global financial markets.
The period of time when the curve was inverted is shown below in the red circle. This was one of the shortest inversions on record, and almost immediately began to normalize.
Since the Fed stepped in, the yield curve has continued to normalize and is now at levels far from inversion.
2019 Year in Search by Google
Lastly, we usually don’t share things that aren’t market related, but Google’s “Year in Search” is quite impressive and is worth the two minutes. If nothing else to get a nice warm feeling about humanity in the face of what seems to be incessant and totally incoherent stream of nonsense about the world around us.
As we wrap up the last few business days of the year, we once again would like to wish you and your loved ones a safe and happy holiday season.
Invest Wisely and Happy Holidays!
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Neither the information provided nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. The investments and investment strategies identified herein may not be suitable for all investors. The appropriateness of a particular investment will depend upon an investor’s individual circumstances and objectives. *The information contained herein has been obtained from sources that are believed to be reliable. However, IronBridge does not independently verify the accuracy of this information and makes no representations as to its accuracy or completeness. Disclaimer This presentation is for informational purposes only. All opinions and estimates constitute our judgment as of the date of this communication and are subject to change without notice. > Neither the information provided nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. The investments and investment strategies identified herein may not be suitable for all investors. The appropriateness of a particular investment will depend upon an investor’s individual circumstances and objectives. *The information contained herein has been obtained from sources that are believed to be reliable. However, IronBridge does not independently verify the accuracy of this information and makes no representations as to its accuracy or completeness.