2019: The Year of the Unexpected Rally

January 15, 2020

2019 was one of those years I was exceedingly delighted we stayed the course and ignored the pundits. I might have been a reluctant bull, but I just couldn't see the naysayers' points. The economy still looks fine, and the twitterverse is still running wild with charts showing all kinds of parallels to previous corrections and recessions. I still don't buy it so let's enjoy reviewing some great 2019 numbers before we move on.

The Russell 3000 returned 31.0%. The best sector, Russell 1000 Growth, returned 36.4%, and the worst, the Russell 2000 value, 22.4%.

Another surprise in 2019 was the bond market rally. The Bloomberg Barclays Aggregate Bond Index returned 8.7%. I felt a little better about having missed this when I read Bloomberg's 12/31 piece: "Behind the Bond Boom No One Saw Coming in 2019" and it's subtitle: "You were probably wrong about fixed income this year. Don’t worry, so was everybody else." https://www.bloomberg.com/opinion/articles/2019-12-31/behind-the-bond- boom-no-one-saw-coming-in-2019

While the Politics (with a capital P) of 2020 does give me pause, I see no reason to fear the markets. But I do see an opportunity for all politicians to reevaluate our economic models and the role of fiscal
stimulus. The glory of supply side economics continues to elude me, and dare I say (?) I am remaining open- minded about alternate economic approaches.

Flipping channels in early December I caught NPR's Consuelo Mack with a flashed statistic we have all seen: In 1980 CEO to worker compensation was 31.6x. Today it’s 278x. She helped me connect some dots: 75% of CEO annual compensation is stock grants and options, which has fueled the quarterly results frenzy for 30+ years. Mack's guest Ken Langone (Home Depot co-founder, huge Capitalist and Republican) offered a stunning interpretation: ‘The reason boards don’t stop this horrible behavior is because they are so highly compensated as board members they never rock the boat.’

I, too, am an ardent Capitalist, and I wouldn't recommend populating corporate boards with a majority of employees or expanding the Federal budget deficit, but there is something to be said for considering reversing the exceptions to Capitalism that current compensation models, deregulation, tax laws, and extreme lobbying have hatched. Add in my other dream of eliminating the carried interest exemption, and we can have a party to celebrate a wellspring of economic growth.

2020 election musings may elevate the conversation, but it’s more likely the outcome in November will elicit marginal tweaks rather than seismic changes in our economic policies and the markets will absorb it come what may.

So it's back to reviewing our economic indicators. Similarly to last quarter, the consumer remains strong, as does housing and employment data, and America’s farmers and manufacturers continue to bear the weight of the trade war. Business investment is a little off, also to be expected during trade uncertainties. It all nets out to a GDP that should be ok:

In September it appeared Value stocks were finally having their day but it was short lived. As my chart below illustrates, Growth still prevails. Value will come around.

Cheers! With all good wishes for a prosperous and peaceful 2020!