As we come to the end of another year, in which they seem to pass too quickly, it can help to take a look at what transpired over the months and how it might help us in our decision making going forward.
History will document that 2019 brought us above average investment returns in most sectors, and also brought worldwide trade wars, political infighting, natural disasters, well known corporate closures, major technological advancement in communication and medicine to name a few. The U.S. economy is continuing to expand at a moderate pace and unemployment numbers are at record lows. As long has been the case, consumer spending is what is keeping the economy growing. The share of internet sales continues to rise versus the big box store sales. What is bought, how it is bought, and how it is paid for is changing minute by minute. Consumers are clearly spending their pay at a healthy clip creating the jobs that keep the economy humming.
While consumer spending is the majority of our economy, care needs to be taken regarding how purchases are made. Overall consumer credit has grown to all time highs. The U.S. mortgage market is relatively healthy today. Americans are currently spending the smallest percentage of their disposable income on mortgage payments in decades. Mortgage payments and delinquencies are near their lowest levels on record. This is mostly due to historically low long-term interest rates.
However, this isn’t the case for consumer debt which includes student loans, auto loans, and credit card debt that has soared to record highs. Delinquency rates on the prime loans appears to be within normal ranges, but delinquencies on riskier, less credit-worthy borrowers are accelerating. The 60-day delinquency rate on these riskier auto loans hit 5.93% in August, which is one full percentage point higher than the peak of the financial crisis in 2009. The story is the same for the riskier credit card holders. That rate of 6.3% is also higher than its financial crisis peak. Obviously, these numbers will rise even quicker if interest rates were to rise.
While on the subject of debt, we must also include risk in the corporate world. Corporate debt has reached an all-time high in the amount of $10 billion. Much of this can be attributed to the record amount of stock buybacks over the past few years. Instead of issuing or increasing dividends to their shareholders, many companies have taken advantage of the low interest rates to borrow and use the proceeds to buy back their own shares. While this benefits shareholders in the present, companies that increase their debt without increasing revenues can quickly get into trouble. We saw an example of those risks in the fall of 2018 when the Federal Reserve began raising the interest rates which would have made the refinancing of debt much more expensive. Equity markets took a tumble of nearly 20%. Although the Fed hit the brakes on the rate increases and resumed the lowering of notes which pacified markets, it is an example of what happens when corporations take on more debt than they can afford. Credit downgrades have increased by rating agencies, such as Standard and Poor’s, and eventually this record debt will have to be addressed.
Stock markets, on the other hand, have rallied nicely since their lows last December. As usual though, there have been periods of consolidation and decline.
It is very reassuring to have the international markets regain their upward movement after a couple years of going nowhere. The easing of the US dollar versus world currencies has helped propel values higher and looks to continue to remain near its current valuation. The portion of assets allocated to the international markets have again provided growth to overall allocation performance by their inclusion.
The US markets have rallied pretty much across the board to date with the S&P 500 growing 31% and the NASDAQ up 37%. A couple of the early year laggards, Financials and Small Companies, have rallied recently near all time highs. These sectors historically set the pace at the start of new up moves and not at market tops. Advancing issues versus declining issues (Advance/Decline) are at new highs and the markets internals remain strong. Energy stocks look to be bottoming after multi-year declines. Asian markets lead emerging markets to an 18-month high. These are all very constructive data points signaling that even better times may lie ahead, as the next leg of economic strength is building.
Why have investors remained so cautious? This is one of the most counterintuitive markets that we can recall. No one wants to believe the economy is doing fine. Investors, including many professionals, are certain that a shoe is going to drop any day. It must be that this sentiment is based solely on the “noise” effect of our 24/7 news bombardment and the inability to tune it out. This past year is the perfect example of the markets doing what frustrates the most. This is evidenced by the hordes of cash sitting on the sidelines earning very little.
The analysts that track fund flows to see where money is being allocated report that investors across the board from pensions to endowments to retail investors have all moved from growth assets to low interest investments without fail throughout 2019.
These analysts conclude that “Unfortunately, many remain locked in this state of “analysis paralysis” and have refused to listen to the actual messages of the market.”
Wall Street strategists are not immune either. In a report, those tracked by a leading financial publication are predicting smaller gains for 2020 than any year going back to 2007. The good news is that those strategists have been too pessimistic in 8 out of the last 11 years versus what the market actually did.
We have been asked by many to look into the companies involved with the growing legal cannabis market. As in any new technology or market, it will take time to figure out who will be the eventual survivors. There are currently so many companies trying to get a piece of this very large pie that it will be some time before mergers, bankruptcies, and illegal operations work through.
Canada is the first major country to legalize cannabis and so far, especially recently, stocks from companies involved there have been volatile to simply crushed as they work through restrictions, governance, etc. Companies in the US seem to be doing a bit better so far adapting to rules and regulations here. But the product is still illegal federally and can propose unseen problems. We are watching a few of these names. Give us a call if they interest you.
The month of October is designated “Financial Planning” month. Hopefully this spurs folks to sit down and take the process seriously. The numbers prove that so far this is not the case. A 2018 Gallop poll shows that only 38% of non-retired investors had a written financial plan. It also mentioned that results showed less than half of all Americans own stocks at all. Given the historical results of equities over time, this is a dangerous trend. Everything starts with a plan.
For the past 40 years we have enjoyed the privilege of wishing you and your families a healthy, happy, and prosperous New Year!
The Lesjak Planning Team