January 2020
Investment Commentary

Reflecting upon 2019 and the tremendous market growth we experienced, it is important to be thankful and to realize that years with such large returns are not the norm.   While we savor last year’s market return, it is important to also look forward by trying to decipher what 2020 will bring.  

The first thought that comes to mind when we look forward is: can the stock market continue to rise after last year’s tremendous growth?  Our team decided to take this question head-on by looking at how the stock market has performed following any year with a 20% or more annual gain.  Using data from the NYU Stern School of Business, we found that the returns for these eligible years since 1975 were positive 71% percent of the time. (1).  While such a finding provides an optimistic outlook for 2020, we also acknowledge that it does not hold any real predictive power.  So, if we can’t predict the future, what can we tell you about this coming year?  Well, we should first begin by looking back at the themes that defined 2019 and then try to understand the themes that will likely define 2020.

2019 THEMES:

The two themes that shaped the markets the greatest in 2019 were decreasing interest rates and increasing isolationism

  • Decreasing Interest rates: This past year the Federal Reserve decreased interest rates for the first time since the Great Recession.  The Federal Reserve made this policy change in order to stimulate the economy by making it easier for individuals and businesses to borrow money.  As a result of decreasing interest rates, banks decreased the amount of interest they would pay for cash sitting in a savings accounts in response to the Federal Reserve’s policy change.  This drove many investors to reallocate some of their savings in bank accounts into stocks since it was the only area they could hope to realize a decent return.  This increase in demand for equities led to one of the largest annual market surges of the past three decades.
  • Increasing Isolationism: 2019 saw a continuation of the rise of both nationalism and trade conflicts around the world.  While this trend may be a natural regression back to normality after 40 years of globalization, it is unclear what countries will be the winners and losers of this reshuffling process.  One interesting investment result of this trend is that as tensions have increased, other countries have been reducing their holdings of US Treasury securities.  Foreign countries now only hold 40% of the US government’s total debt, down from over 50% before 2015.(2)  While this may not initially seem problematic, this reduction in demand for US debt may be an issue as there may be less willing buyers in the world just as our entitlement spending is expanding with the continued retirement of baby boomers over the next decade.  Regardless of what political party is in power after November, they will likely need to work to maintain America’s role as the pre-eminent economic power as the country continues working to redefine its trading partnerships.  

2020 THEMES:

  • Cautious Growth: Historically, the stock market has risen in most presidential election years, regardless of which party’s candidate wins.  In fact, the average return in all election years since 1900 is 9.5%.(3)  In part, this can be attributed to the fact that the incumbent party/candidate is often incentivized to avoid creating any law or political event that will negatively affect the economy because they do not want to risk losing voter support close to the election.  In a similar light, the Federal Reserve also tries to avoid making any sudden changes to interest rates out of fear of being viewed as a political move meant to help one of the candidates.  The result is an environment that is often temporarily more stable for the stock market.  
    • How to Invest:  This “status-quo” environment created by the cautious mentality of the Federal Reserve and political parties will provide investors with another respite of time to reallocate their portfolios.  In particular, we would look to ensure that US-focused companies have a larger role in your portfolio.  As we mentioned above, interest rates remain extremely low globally, but compared to other regions of the world, such as the European Union and Japan, where interest rates are negative, the US has more attractive yields since they are above 0%.  As a result, money will continue to flow into US bonds and equities where investors believe they can both receive more safety and possibly a higher return.    
  • Technology-Takes-All Mentality: The past decade of market growth has been dominated by the tech giants, most notably Google, Amazon, Microsoft, Apple, and Facebook.  To put this into context, Microsoft alone is worth more than the entire energy sector in the United States.(4)  While this unprecedented growth has been positive for many investors, it also means the stock market is more susceptible to instability since market growth has been led by a few companies, meaning the base of growth is smaller.  Consequently, any negative movement from these tech giants could have a big impact on the market as a whole.  The “status-quo” environment we discussed above offers a great opportunity to reallocate your portfolio to ensure it is not over-concentrated in one or two large stocks.
    • How to Invest: We do not believe that the impact of technology or firms that utilize it will become less important in the future.  In fact, we believe one of the reasons the US market has outperformed international markets, and will continue to do so, is because of this country’s focus on creating innovative technology.  This is why roughly 25% of the US stock market is composed of technology firms compared to only 7% in the international markets.(5)  As a result, we would recommend that investors look for large US companies that are using their dominant market position and large cash flow to invest in innovating their business models. 

We are now in our 11th consecutive year of the bull market, which means that unlike the past when any investor could put money into the stock market and realize an attractive return, investment choices will become more important.  Since we are unlikely to consistently see the high returns of 2019, investors will need to better discern between good and bad investments rather than just hoping their investments will rise with the tide. It is also important when choosing investments to consider your time frame and risk comfort.  

Wishing you and your family a blessed and healthy 2020,

The Glen Eagle Investment Team


1. NYU Stern: “Annual Returns on Stock, T.Bonds and T.Bills: 1928 - Current” 01.14.20 2. Barrons: “Count on This: Next Year’s Financial Markets Won’t Be So Nice” 12.27.19 3. TheMotleyFool: “How Will the 2020 Election Affect the Stock Market?” 12.06.19 4. Yahoo Finance: “Why Oil No Longer Rules The Stock Market” 5. Bloomberg Radio: “Colas Shares Six Word Market Narratives” 

Disclosure: This commentary is furnished for the use of Glen Eagle Advisors, LLC, Glen Eagle Wealth, LLC and their clients. It does not constitute the provision of investment advice to any person. It is not prepared with respect to the specific objectives, financial situation or particular needs of any specific person. Investors reading this commentary should consult with their Glen Eagle representative regarding the appropriateness of investing in any securities or adapting any investment strategies discussed or recommended in this commentary.