2019 Market Review & 2020 Outlook
2019 Market Review and 2020 Outlook
A Look Back at 2019
2019 brought a rollercoaster of emotions for both investors and financial professionals alike. The year was filled with a seemingly unending cycle of record-breaking highs and lows. While the year ended with sizeable returns for the S&P 500, just three days into 2020 we found ourselves watching the market dip yet again due to political concerns. With this volatility appearing to stick with us for 2020, we wanted to take a look at some of the main drivers that move the market and how we expect they will play into returns for 2020.
Politics & Policy
As with 2019, we expect to see more volatility related to the US and foreign politics. Entering into an election year, we anticipate market swings that come with the uncertainty of changes in leadership and policy. However, this volatility will reach far beyond election day, no matter what the outcome.
A look back at election cycles over the past few decades shows no substantial effect regarding which party wins, however the market does experience lagging gains during the election year and the year following a presidential election. This has been the case with each election since 2008.
We are also beginning to see other indicators of market movement, such as the trends that appear during late cycle bull market periods. One of these indicators is the debt to corporate profits ratio. At the end of 2019, US corporate debt, with the exception of the financial industry, was about $10 trillion, or 48% of US GDP. This is 52% higher than its last peak of roughly 44% of US GDP in 2008. This is often seen at the end of bull market cycles as companies are reinvesting profits into technology and research. While this is not a causal reason for a recession, it is an indication that a shift in company strategy is underway.
Another indication that we are in a late cycle period is that the labor market is tightening rapidly. According to the American Staffing Association, temporary staffing is falling at its fastest rate in ten years. The tight labor market means higher costs for employers.
While this stage in the economy does lend to an impending bear market, it is important to stay invested. The objective of a long/short strategy is to produce returns while mitigating down side risk. Investments will continue to compound interest, even when the market is sluggish.
Sectors to Watch
2019 was marked by continued growth in the technology sector. With technology making up 23.2% of the S&P 500, and the next largest sector being health care at 14.2%, it is easy to see how technology stocks can help predict the market movement. This past year we saw increasing growth in these stocks. When the market is in a growth cycle, companies tend to reinvest in themselves, and right now that investment is happening in tech.
On the other side, perhaps one of the most talked-about sectors, when recession anxiety is high, is the consumer staples sector. However, even with investor anxiety high in 2019, defensive stocks, such as those in the energy and industrial sectors, slightly lagged in 2019. This again indicates the consumer confidence that we expect to carry into 2020.
When trying to project market returns, future events can not necessarily be determined by past trends. But the good news is that our role as an investment manager is not to study the events and trends of the past but to study the key factors that contribute to market growth and use that information to make successful investment decisions. By identifying these key factors for each stock, we can block out a lot of the noise that contributes to poor decisions and take advantage of opportunities, even in times of high volatility.
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Waycross Partners, LLC (“Waycross”) is an independent, privately owned investment management firm registered with its principle place of business in Louisville, Kentucky. Waycross three distinct investment strategies to our clients, which are made up of institutional and high net worth individuals.
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Any projections, market outlooks or estimates in this document are forward looking statements and are based upon certain assumptions. Other events which were not taken into account may occur and may significantly affect the returns or performance . Any projections, outlooks or assumptions should not be construed to be indicative of the actual events which will occur. The enclosed material is confidential and not to be reproduced or redistributed in whole or in part without the prior written consent of Waycross Partners. The information in this material is only current as of the date indicated, and may be superseded by subsequent market events or for other reasons. Statements concerning financial market trends are based on current market conditions, which will fluctuate. Any statements of opinion constitute only Waycross Partners’ current opinions, which are subject to change and which Waycross Partners does not undertake to update.