In 10 years, no one will remember the specifics of 2019. Only historians will reminisce about the market undulations, the Federal Reserve’s waffling, and any of the political theatrics. Most will recall 2019 as a historic year in the capital markets. Large cap domestic stocks were up over 30%, and fixed income was up over 8.5%*. How rare is that outcome? It hasn’t occurred since 1997 when the S&P 500 was up 33.4%, and the Barclays Aggregate Index posted a 9.7% return.



Even though it has been awhile since we have had such a banner year, the chart above shows that domestic equities have posted positive years 80% of the time since 1990. The average return of large cap stocks over that time is almost 11.5%, yet the compound growth rate (the amount by which an investment would have grown over that time) has only been 10%. That may not be intuitive without the knowledge that money grows geometrically – if you have a dollar and lose 50%, your remaining $0.50 must grow by 100% to get back to your original dollar. The same sad fact is true in the inverse – if your dollar increases by 100% to $2, you only need to lose 50% to get back to square one. The losses in 2001, 2002 and 2008 more than offset the years in which the market earned greater than 30% positive returns if an investor did not have money to buy more stocks during those dips.

What you will also notice about the graph above is that 1997 was followed by 2 years in which the S&P 500 had returns of more than 20%. While it is not our base expectation for 2020 and 2021 to repeat such strong performance, there are some similarities between today and 1997. Back then, a nascent technology, the internet, promised to increase the productivity of workers. Today, robotics, automation, and big data offer a similar path to increased economic activity. Back then, the Federal Reserve was becoming interventionist. Today, the Fed is solidly acting to promote economic growth. Back then, investors worried about heightened equity valuations that eventually spun up to unsustainable levels during the Tech Bubble. Today, investors are starting to talk about the market being “richly valued.” With investors facing few “cheap” alternatives to stocks, could we again see valuations spike? It is possible. We do not see the euphoria in the market today that was evident in the later 1990’s. As a matter of fact, we could make the argument that last year was one of the least loved market rallies in recent history. There is a lot of cash on the sidelines that could continue to fuel what is now the longest bull market in history.
 
Of course, if predicting markets was easy, we would all be sitting on a beach somewhere. The next decade will not likely look like the decade just passed, but long-term investors need to be in the risk asset game to earn positive real rates of return. At the same time, they need to be cognizant that large drawdowns can wipe away the good times quickly if they are not properly allocated.
 
We wish you and your families a wonderful New Year!

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