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Weekly Market Commentary – December 30, 2019

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Stock markets continued to march steadily higher last week. News was relatively light, but momentum and reduced uncertainty helped push the markets toward a series of new highs.

Key Points for the Week

  • Stocks reached new highs, and 2019 has turned out to be a phenomenal year. But the last 15 months have been average for stocks.
  • Durable goods came in weaker than expected but increased for the first time in five months.
  • Volatility has returned to low levels with only five 1% moves this quarter; the last one was October 11.

As shown in the accompanying chart, the steady climb came with very few big moves in either direction. The fourth quarter had only five moves of 1% or more, and the last one occurred more than two months ago, on October 11.

The durable goods report provided evidence the business sector continues to improve. Spending on longer-lasting goods improved for its first yearly gain in the last five months. Orders for core durable goods, which exclude aircraft and serve as a stable proxy for business spending, rose 0.5%.

The S&P 500 soared 0.6% last week and reached another new record high. The global MSCI ACWI gained 0.7% as global stocks benefited from continued optimism about stock markets. The Bloomberg BarCap Aggregate Bond Index rallied 0.3%.

What a Difference a Year Makes

As a fantastic year wraps up in the markets, it pays to remember where markets were last year at this time. Stocks were just starting to rebound from a 19.4% drop that started in late September and culminated on Christmas Eve after the S&P dropped by more than 1.5% in six of seven trading sessions and was basically flat the other day.

The decline in 2018 was driven by concerns regarding trade and a Federal Reserve that seemed intent on raising interest rates. The rally in 2019 was helped by a truce on trade and data that showed a U.S. economy with a healthy underlying growth trend. But the Federal Reserve cutting rates was the crucial factor. As we joked earlier this year, perhaps stock certificates should come with a stamp saying “In the Fed We Trust” to reflect the important role the Fed has played in supporting the markets.

Because the market bottomed so close to the end of the year, 2019 data will generally be very strong. The S&P 500 is up 31.8% this year and bonds have produced an exceptional year, too. Investors who focus only on 2019 and forget the volatility of 2018 are painting a very optimistic view of markets.

Instead of starting anew with the turn of the calendar, another way of looking at performance is to go back to the previous peak and see how the market has performed. In 2018, markets peaked on September 20. If performance is measured from the close through Friday, the S&P 500 has grown at an annualized pace of 10.4%. This is very healthy performance that stock investors should be glad to get, but it is near the long-term average performance for stocks. If the same analysis is done for stock indexes measuring the performance of developed international stocks, emerging markets or small-cap domestic stocks, the performance is weaker. Small-cap domestic stocks, represented by the Russell 2000, are actually lower since the 2018 peak.

Index

Return since 2018 Peak

(9/20/2018)

S&P 500

 

10.4%

MSCI ACWI

 

8.1%

BBgBarc US Agg Bond

 

8.5%

Russell 2000

 

-0.9%

As the calendar turns to 2020, be thankful for the strong year in 2019, but also temper your expectations and let history be your guide. The returns over the last 15 months tell a more realistic tale of what stock investing is like. The potential for strong returns is possible, but it comes with the willingness to bear risk. When evaluating performance, be careful not to focus on just the S&P 500. While it is the popular index for comparisons, it also happens be a very strong performer and can make prudent diversification look less attractive.

Fun Story

Happy New Year – A New Way to Solve Quadratic Equations

[Warning – the video in this article includes explicit mathematical content and should not be viewed by people with bad memories of math classes or those uncomfortable watching people excited about mathematical equations.]

A professor has come up with a new way to solve quadratic equations. The method takes the guesswork out of finding a solution. Quadratic equations include an x term with a square, making the solution more complicated. The former method required breaking the quadratic equation into two new equations that, when multiplied, match the original equation. The professor was able to make the process more formal. If adopted, it will change the way junior high students learn a key mathematical concept. The video in the article provides a great summary for the mathematically courageous.

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