Cornerstone’s Week on Wall Street
As 2019 draws to a close it’s a good time to reflect on the year that was. In this version of Week on Wall Street, we take a look back at Cornerstone’s Five predictions for 2019, that we shared with readers in one of our early January 2019 letters. We’re giving ourselves credit for 3.5 out of 5, and overall are happy with our results. At the time the S&P 500 corrected nearly 20% and finally bottomed out on Christmas Eve. The Fed completed it’s ninth rate hike of the cycle, and their Quantitative Tightening program was on “autopilot.” Both stocks and bonds had negative returns in 2018, and recession fears gripped the market.
What a difference a year can make! Financial markets had a fantastic year in 2019 as stocks and bonds largely exceeded expectations. After all of the adversity that investors faced in 2018, who would’ve thought that the S&P 500 would rally nearly 30% and have its best year since 2013? We never claimed to have a crystal ball, nor put much stock in long-term forecasts, but believe strongly in remaining data dependent, focusing on risk mitigation, and constantly working to improve on our process and our results. 2019 was a fantastic year at Cornerstone and we have much for which to be thankful. We thank you for the opportunity to work for you and wish all of our valued clients a happy and prosperous New Year!
Prediction 1: The U.S. economy does NOT fall into recession in 2019.
After a recession scare in the 4th quarter of 2018, alongside a sharp equity market correction, GDP growth stabilized and fortunately this prediction held up. While US GDP growth slowed during 2019, the economy grew by more than 2% for the first three quarters of the year. We do think 4th quarter GDP growth could surprise to the downside, but a strong consumer is more than offsetting a slowdown on in the manufacturing economy.
Prediction 2: Stocks are positive and outperform fixed income.
Granted that this prediction was not the most daring, but after coming out of a year where stocks were negative and did underperform fixed income, we’re okay with a layup. Stocks are ending the year on a high note, as the S&P 500 is up almost 30% year-to-date. We will be the first to admit that we did not see that coming in January as markets bottomed off of a 20% correction, but are now somewhat concerned about valuations and the levels of complacency in risk assets going forward.
Prediction 3: Emerging market stocks outperform U.S. stocks.
Swing-and-a-miss! While emerging market stocks had a strong year, and were up nearly 20% in 2019, they did not keep pace with U.S. markets. This was the one prediction that we completely missed in 2019, but don’t be surprised if this one ends up on our 2020 list. The U.S. dollar was stubbornly strong for most of the year, but finally began to break down over the past few weeks. In fact, since 9/30/2019 Emerging Market stocks have outperformed the S&P 500 gaining 10.1% compared to 8.7% respectively as of this writing. With a backdrop of higher forecasted growth rates, and a 30% discount to the U.S. on a forward P/E basis, emerging markets could be poised for comeback in 2020.
Prediction 4: We secure a “trade deal” with China during the first half of the year.
Around this time last year, we were convinced that a trade deal with China would come sooner rather than later. Both economies were slowing and we thought that both leaders had reasons to cooperate at the negotiating table. A deal was almost inked back in May, but unfortunately it took an escalation of tariffs on both sides, and much back and forth before a Phase 1 deal was agreed upon in October. While the deal has yet to be signed, recent reports indicate that the Chinese delegation will return to the U.S. for a signing ceremony as early as this coming weekend.
Prediction 5: No Fed rate hikes in 2019.
Since we took our medicine on Prediction 3 regarding emerging markets, we’ll give ourselves an extra pat on the back for this one. This time last year the Fed completed their ninth rate-hike of the cycle, forecast two additional hikes in 2020 via their dot plot. Consensus expectations were for continued hikes with some Wall street research shops calling for 4 hikes. We were happy to take the other side of that trade, and as we all know, not only did the Fed not hike in 2019, they went on to cut rates 3 times, with the first cut coming in July. As of this writing, the Fed’s dot plots for 2020 indicate the plan to remain on hold, with the forecast for the next action being a hike in 2021.
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