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2019 Q4 Commentary - 2019…The Year of Surprises

                The year 2019 contained many pleasant surprises for investors. This was quite unexpected by most. As you may recall, the fourth quarter of 2018 was brutal, with the S&P 500 index falling more than 10% in the quarter. And the selling accelerated into year-end resulting in the index’s worst December performance since the Great Depression. On the heels of these tough losses, many pundits were forecasting a gloomy 2019. The talk of an impending recession covered the pages of the financial press. And then the first quarter of 2019 happened! Markets rallied strongly to start the year with the S&P 500 index returning close to 14% on the quarter. One of the potential catalysts for this strong rebound was a reversal in Federal Reserve (the Fed) policy. After increasing interest rates multiple times in 2018, in January of 2019, the Fed signaled it would no longer raise rates and was open to cutting them to ease financial conditions and stimulate the economy. The market cheered this reversal in policy, igniting a furious rally. One of the biggest surprises of the year was the significant decline in interest rates. Very few experts were forecasting the aggregate bond index to return anything close to 8% for the year. And yet it did. It is safe to say the 2019 synchronized rally in stocks, bonds, and commodities caught many by surprise.

                As we enter each new year, the market is typically faced with potential headwinds as well as catalysts. The following are just a few we are monitoring.

Potential Headwinds

  • Valuations appear fairly priced to expensive – After the strong rally in 2019, many stocks became more expensive on many traditional metrics. This may have occurred because much of the return in 2019 came from multiple expansion in the price-to-earnings ratio and not growth in underlying profitability. Will the economy continue to grow powering corporate profitability?
  • Bullish sentiment – December closed quite strong for the financial markets with bullish sentiment high. The antithesis of December 2018. Will this result in investor expectations being unmet and a market correction? 
  • Geopolitical concerns – The recent sabre rattling between Iran and the U.S. has refocused attention on how geopolitical tensions could derail the recent stock market advance. Will the killing of Iranian General Qassem Soleimani lead to a protracted conflict or will it be contained?
  • Political uncertainty – As the U.S. approaches another presidential election in November, political uncertainty may begin to be priced into the markets as investors try to anticipate any significant policy changes in taxation, regulation, or trade.

Potential Catalysts

  • Federal Reserve Policy – The Fed has clearly communicated that it has no intention of raising rates for the foreseeable future. In addition, the Fed has expanded its balance sheet by $400 billion in four months, a $1.2 trillion annual pace. Since the Fed announced on October 11 that it would begin buying Treasury bills, stocks have gone on a tear.
  • Value appears compelling – Growth stocks have outperformed value stocks over the past decade by one of the largest margins on record. This leaves some value-oriented stocks attractively priced.
  • Presidential actions – Politics aside, President Trump will likely do everything within his power to keep the economy strong through November to increase his chances of re-election. While the President doesn’t control the economy, he can use his bully pulpit and executive orders through the Treasury department to attempt to fuel animal spirits in the economy and financial markets.

As we begin a new year, many pundits are putting out their predictions of what will happen in 2020. As you well know, we aren’t in the prediction game. The world is a complex place making predictions nothing more than a game of chance or luck. Sometimes you might be correct but most of the time you will be wrong. Rather, we are in the business of walking alongside the families we serve to help them meet their financial goals. This requires a well-constructed plan that is executed with discipline, regardless of market conditions. Paraphrasing what Warren Buffet has said, we want to know what our circle of competence is and stay within that circle. As such, we will stay focused on investing in businesses and/or securities offering compelling risk/reward opportunities and leave the prognosticating to others.

The entire team at PYA Waltman Capital wishes you and your family health, happiness, and prosperity in 2020!

The opinions expressed herein are those of PYA Waltman Capital, LLC (“PYA Waltman”). The opinions referenced are as of the date of publication and are subject to change due to changes in the market or economic conditions and may not necessarily come to pass. This information shall not constitute investment advice or a recommendation to buy or sell any security or service. 
PYA Waltman Capital, LLC, is an independent investment adviser registered under the Investment Advisers Act of 1940, as amended. Registration does not imply a certain level of skill or training. More information about PYA Waltman including our investment strategies, fees and objectives can be found in our ADV Part 2, which is available upon request. PYA-20-02