DATE: January 1, 2020

FROM: David G. Dietze, JD, CFA, CFPTM, President and Chief Investment Strategist

I.   Performance Update

It was a quarter, a year, even a decade to remember.  Stocks continued higher in the Fourth Quarter, bolstered by optimism over a breakthrough in the trade negotiations between China and the US, to include a Phase 1 accord in January.  Stocks recorded their best year since 1993, with the S&P 500 up over 30% including dividends.  Markets were driven by a Federal Reserve that pivoted from a tightening posture a year ago to one of monetary accommodation, highlighted by three rate cuts in 2019.  The last ten years was the fourth best decade in the last 100 years, with the S&P recording an average annual 13%+ advance.
MARKET DATA 12/31/18 to 12/31/19 Fourth Quarter 2019
S&P 500 (dividends reinvested) 31.49% 9.08%
NASDAQ (dividends reinvested) 36.69% 12.53%
60/40 S&P 500 / TX-EXEMPT SECURITIES BLEND 21.66% 5.69%
DOW JONES INDUSTRIALS (dividends reinvested 25.09% 6.58%
TAXABLE BONDS (Barclay’s 1-3 Yr Gov’t/Credit) 4.03% 0.59%
TAX-EXEMPT SECURITIES (Barclay’s Muni Index) 7.54% 0.74%
Over the last decade interest rates dropped substantially, with the 10-year Treasury’s yield falling by nearly half, to just 1.9%.  Corporations responded, borrowing cheap money hand over fist.  However, not all the borrowings went into expanding plant and equipment; much was used to buy back stock and hike dividends.  Earnings per share doubled over the decade as a result of this financial engineering, even though net income was only up 50% during this period. Corporate leverage has increased substantially since the start of the decade.
Two stocks defined the quarter, the year, even the decade:  Apple (AAPL) and Microsoft (MSFT).  Apple jumped 31.5% in Q4, 88.1% for the year, and soared 26.3% per annum on average for the decade, compared with 9.1%, 31.5%, and 13.6%, respectively, for the S&P.  The iPhone became ubiquitous, as well as iTunes and related services.  However, caution is now in order, as revenues and cash flow dropped last year.  Given the history of phones, from Motorola, to Nokia, to Blackberry, to now the iPhone, don’t be surprised if at the end of the next decade the iPhone is less prominent.  Microsoft rose 13.8% in the quarter, 57.1% for the year, and had an average annual return of 18.7% for the decade.  It’s bearing down on Amazon (AMZN) for dominance of the cloud, while its office productivity software continues to enjoy near monopoly status.  As recently as 2014 Microsoft was a so-called Dog of the Dow, meaning it had one of the top ten dividend rates among the Dow 30.  Since then its market capitalization has grown from $300 million to $1.2 trillion.
So called value stocks started the year slowly but accelerated into year end.  The Invesco S&P 500 Pure Value ETF (RPV) advanced 13.2% from September 1 until year end, outpacing the S&P 500 index, up just 11.2%.  Left sharply behind were momentum and “low volatility” strategies, as ETFs targeting those strategies were up just 3.2% and 2.2%, respectively, during that period.
Overseas stocks posted solid gains in Q4, spurred on by news of breakthroughs in trade arrangements.  In addition to the US and China trade deal, the House passed the so-called USMCA (United States Mexico Canada Agreement), a type of NAFTA (North America Free Trade Agreement)  2.0, while Boris Johnson’s reelection helped clarify UK’s path to Brexit.  Euro area stocks had their best return since 2009, up 23%, and Shanghai stocks were up 22%.  However, the protests in Hong Kong caused its early year gains to unravel, and it finished the year up (just) 9%.
Interest rates ended the year and the decade much lower than where they started; the Ten-Year Treasury at the start of the decade yielded 3.54%.  However, rates did rise a bit in Q4 as investors became increasingly confident a recession was not in the offing.  The much-feared rate inversion, where the Ten-Year yields less than the Two Year, as was seen briefly in August, seems now to be firmly in the rear-view mirror; the year ended with the Ten-Year yielding 0.34% more than the Two Year, the biggest differential since 2018.  Corporate bonds, both high yield and investment grade, did quite well in 2019, up 14.4% and 8.7%, respectively.  However, the “spread,” meaning the extra yield earned on them over Treasuries, dropped dramatically.  This leaves such bond investors with little protection should both rates rise and that spread widens to more typical levels.
FIXED INCOME ASSET 12/31/18 03/31/19 6/30/19 9/30/19 12/31/19
US Government 10 Yr. Note 2.69% 2.41% 2.01% 1.68% 1.91%
5-Year Certificate of Deposit 2.02% 2.02% 1.93% 1.57% 1.41%
Money Market
2.08% 2.13% 2.07% 1.68% 1.31%

II. Looking Forward

Investors must temper expectations going forward.  Most of stocks’ returns in 2019 were due to valuation improvement and expansion in the “multiple” that investors were willing to pay for corporate earnings.  Similarly, much of the return on bonds and other fixed income was as a result of a drop in interest rates.  As rates sink lower and stock valuations’ pricier, the likelihood of further rate cuts and valuation improvements decreases.  Nevertheless, it is not easy to predict what will be the catalyst for volatility in stock and bond markets.  Our best advice continues to be to think long term and to stay diversified, seizing opportunities to improve portfolios’ potential when possible.

IMPORTANT: Point View Wealth Management is an SEC registered investment adviser (Registration of an Investment Adviser does not imply any level of skill or training) and a subsidiary of Peapack-Gladstone Bank. This publication is only intended for clients and prospective clients residing in the states in which Point View Wealth Management is qualified to provide investment advisory services. Please remember that past performance may not be indicative of future results.  Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product including the investments and/or investment strategies recommended or undertaken by Point View Wealth Management, Inc. (“Point View”) or any non-investment related content, made reference to directly or indirectly in this commentary will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this commentary serves as the receipt of, or as a substitute for, personalized investment advice from Point View. Point View is neither a law firm nor a certified public accounting firm and no portion of the commentary content should be construed as legal or accounting advice. A copy of the Point View’s current written disclosure Brochure discussing our advisory services and fees continues to remain available upon request. 
Securities and mutual funds are not FDIC insured, are not obligations of or guaranteed of Peapack-Gladstone Bank, and may involve investment risk, including possible loss of principal. Information provided for educational purposes only.

Article Index

Understanding Market Volatility - by Fritz Schoenhut, 3.31.20.
You Should Feel a Bit More SECURE - by Claire Toth, 3.31.20.
Don't Panic! Rebalance! - by David Dietze, 3.30.20.
Taxes in the Time of Coronavirus - by Claire Toth, 3.26.20.
Coronavirus and the Markets - by David Dietze, 3.5.20.

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