Gill Capital Partners January 2020 Market Commentary

Q4 & 2019 Market Review

In direct contrast to 2018, the fourth quarter of 2019 saw strong performance, pushing many markets to all-time highs and concluding one of the best years for equities in recent history. In fact, the S&P 500 had its second best year (in terms of performance) in the past ten years, second only to 2013. Looking at 2019 asset class returns in the chart below, we see that the S&P 500 led all major equity indices globally with a 31% total return. Other major U.S. indices finished the year with total returns closer to 25%. International and emerging market equities, as represented by the MSCI EAFE and the MSCI Emerging Markets indices, were up 22% and 18%, respectively, marking excellent years. Fixed income markets also generated outsized returns in 2019, with the Barclays Aggregate Bond Index up 8.54%.

Many investors may be scratching their heads trying to understand 2019 performance given heightened concerns and perceived headwinds. These include trade wars, political instability (here in the U.S. and abroad), fears of dramatically higher interest rates, forecasts for a recession, conflicts with Iran, and a general state of heightened geo-political tension. Despite all of these concerns, investors saw one of the best years in recent history. Strong economic fundamentals and a supportive shift by the Federal Reserve are largely responsible for the outstanding capital market performance in 2019. Many investors question how the market could perform as it did given the level of perceived headline risk in the world today. We will discuss this in more detail below, along with our outlook going forward, but, quite simply, fundamentals and elevated liquidity are very powerful forces and will generally outweigh headline and episodic risk. While 2019 will be remembered as one of the best years on record for investors, it certainly did not feel that way from an investor sentiment perspective.

Looking Ahead – Fundamental Strength with Bouts of Volatility

As we look forward into 2020 and beyond, we continue to see a market that is torn between fundamental strength and a certain level of market and investor anxiety attributable to a heightened geo-political volatility. Below is a review of the key sources of fundamental strength and stability along with a few potential sources of volatility that we see for 2020.

2020 Sources of Strength and Stability:

·       Global Economic Breadth – 95% of the world’s economies are expected to grow in 2020. This represents a strong synchronous global growth picture.

·       Global Central Bank Support – Not only is the U.S. Federal Reserve in an accommodative posture, central banks globally are very accommodative. In fact, 35% of the world’s central banks are cutting rates, with the remaining 65% on hold, and zero central banks currently hiking rates. This global central bank support is an extremely powerful fundamental source of liquidity and positive force.

·       Earnings Growth – Consensus forecasts predict that S&P 500 earnings will grow by roughly 6% in 2020. While not the double digit growth rates we saw in 2017 and 2018 following tax reform, the forecasted mid to single digit growth rates are still positive and represent important fundamental strength in this economy.

·       GDP Growth – Consensus forecasts call for 2%-2.5% GDP growth in the U.S. This is slightly lower than 2019, but again, this is still growth, and another pillar of fundamental support. Through much of 2019 many were calling for a potential recession in 2020. Most of those forecasts have disappeared, and have been replaced with a moderate growth picture.

·       Household & Consumer Health – Consumers in the U.S. are healthy. In fact, the household savings rate is currently at 8%, nearly twice what it was before the financial crisis. Furthermore, U.S. households have been borrowing less and paying off debt for years.  Currently, household leverage is at a 34-year low after having peaked in 2007.

2020 Potential Sources of Volatility:

·       Politics, Impeachment, & Elections – The political environment has created and will likely continue to create a heightened level of volatility for markets this year. This volatility has been episodic and brief, often on the back of presidential tweets and headlines, and we see that continuing.

·       Trade – Trade has been the most impactful single issue for markets over the past year. Even though a phase one trade deal has been signed, there is likely more to come on trade, potentially involving the EU or other major trade partners in addition to China.

·       Corporate Leverage – While households have been deleveraging, corporations have been binging on cheap debt. In fact, corporate leverage ratios are well above pre-2007 levels. We do not see this as a catalyst to a downturn, market correction, or a slowdown, rather something that will become an issue in the next recession.

·       Valuations – The equity market rally at the end of 2019 pushed valuations to above average levels. The price to earnings (P/E) ratio of the S&P 500 now sits at 18 times forward earnings, as compared to the long term average of 16 times. This is comparable to the lofty levels seen in the late 90s when P/E ratios were in the mid 20s. While stocks are certainly not cheap, history has shown that they can remain elevated for some time, particularly if earnings continue to grow, inflation remains in check, and interest rates remain low. However, the current level of valuations suggests moderating returns in the future.

In summary, while clear sources of volatility remain, we view most of these to be drivers of intermittent fluctuations as the fundamental picture remains strong. We see a global economic backdrop that is supportive of growth with global central banks clearly on the side of investors. As long as inflation remains low, central banks can remain accommodative. A change in the Federal Reserve’s positioning to a more aggressive inflation fighting stance would change our view dramatically. Until that time, we remain vigilant, and we continue to rebalance portfolios.

Higher 2020 Retirement Plan Contribution Limits

The Treasury Department has announced inflation-adjusted figures for retirement account savings for 2020:

·       401(k) – 401(k) contribution limits have increased to $19,500 from $19,000 in 2019.

·       HSA – The 2020 cap on HSA contributions has risen by $50 to $3,550 for individuals and $7,100 for families.

·       IRA – IRA contribution limits remain unchanged at $6,000 ($7,000 for those 50 and older)

Don’t hesitate to reach out and discuss with us how to maximize your retirement savings.

As always, please let us know if you have any question or concerns, or if we can provide assistance with any other financial matters or questions