Winter Quarterly Commentary

Life is divided into three terms – that which was, which is, and which will be. Let us learn from the past to profit by the present, and from the present, to live better in the future.”

William Wordsworth (1770-1850)
English poet laureate
Initiator of the Romantic Age

We would like to ring in the new year and provide our predictions for the U.S. economy in 2019:

  • 3.7% unemployment – the best in 50 years
  • Three percent real GDP growth – the best in a decade
  • Double-digit corporate earnings growth – more than twice the long-term rate
  • Consumers in good financial shape, with their strong spending driving two-thirds of GDP
  • More fiscal stimulus
  • Major stock market indices down six percent

Surely, given our sunny economic outlook, the stock market return prediction is a misprint? It’s not. In truth, these aren’t predictions for 2019 at all, they are the actual numbers for the upside-down year of 2018.

Last year’s good economy but bad stock market is not actually as surprising as one might initially think. We displayed the chart at right last quarter, but it is so striking we include it again. Markets rarely look at current conditions, but rather move based on what’s coming next. Today’s ultra-low unemployment rate, for example, points to a monthly market return near zero (left most bar with unemployment rate <4%) whereas stocks have annualized at a higher than 30% rate under double-digit unemployment rates, based upon data since 19551.

The breadth of declines in investment values around the world in 2018 was unprecedented. Both stocks and bonds declined, which is highly unusual. Additionally, commodities and gold were down along with nearly every single foreign equity market. 93% of all global asset classes showed negative returns last year according to Deutsche Bank, a first since 1901. Diversification did not save the day. In retrospect, the best option was to own cash… the best asset allocation didn’t involve making the most, but losing the least. Such a year is fortunately very rare.