2019Q4 Lookback

2019Q4 Lookback

The last quarter of 2019 finished very strong with the VIX fear index falling 13.7% while the major indices roared on, gaining between 6-12% in the three month period. These fourth quarter returns are extremely robust; recall that between 1928-2018 stock market as measured by the S&P 500 returned 10% a year on average.1

This data table was created in Microsoft Excel using data from Yahoo Finance.2

The latest federal funds rate of 1.55% shows a large retracement from the recent 2.42% rate seen at the end of 2019Q1. This rate is sometimes used as a measure of the risk-free-rate which in turn is used to discount cash flows and value various investments. The lower rate does seem to have impacted markets logically, by decreasing the discount rate equity values as a whole rose rather substantially through the end of 2019.

This chart was created in Microsoft Excel using data from the Federal Reserve Bank of St. Louis Economic Research website.3

Using data from the National Bureau of Economic Research, I created the chart below that showcases U.S. business cycle expansion and contraction throughout recent history. Given, “The determination that the last expansion began in June 2009 is the most recent decision of the Business Cycle Dating Committee of the National Bureau of Economic Research”4, the current expansion completed its 126th month in December. The current expansion is over two times the size of the average expansion seen since the Great Depression, and over three times the average expansion size of all expansions on record. Also of note, the expansion is now two quarters longer than the previous largest expansion which ended with the dot com bubble.

This chart was created in Microsoft Excel using data from the National Bureau of Economic Research.4

Positive trends continue, albeit at a slower pace, in regards to GDP growth. Since October of 2009 the Seasonally Adjusted Annualized Quarterly Real GDP has averaged 2.2% annual growth, ranging from 0.2% to 4%.

These charts were created in Microsoft Excel using data from the Federal Reserve Bank of St. Louis Economic Research website.3

The media often speaks to the unemployment rate being very low as being an indication the economy is healthy. However, it is vital to remember that a counteracting gauge is telling a different story, the labor force participation rate. As the unemployment rate has declined from over 10% in 2010 to 3.57% at the end of 2019, the labor force participation rate has also declined from over 66% in 2008 to the latest November reading of 63.2%.

This chart was created in Microsoft Excel using data from the Federal Reserve Bank of St. Louis Economic Research website.3

The official 2019 real median household income level is not yet publicly available. Taking a look at the last 10 years of data, the annualized increase in real household income has been 0.72%. This would imply a 2019 value of $63,633. This growth rate is very low, especially given the consistent GDP expansion and the very long bull market highlighted earlier.    

This chart was created in Microsoft Excel using data from the Federal Reserve Bank of St. Louis Economic Research website.3

As you can see in the graph below, the inflation rate has ranged between 1.3% and 2.6% over the past decade, this price level increase is considered implicitly with the calculation of the real median household income growth.

This chart was created in Microsoft Excel using data from the Federal Reserve Bank of St. Louis Economic Research website.3

The longest bull market in history has continued into 2020. While the returns seen in the last quarter of 2019 will likely cause some FOMO among those who were scared away from the markets in the fourth quarter of 2018, I have been slowly reallocating more to value based plays and I continue to diversify away from the top movers (recently trimming my Apple position for instance). I foresee increased volatility ahead with the U.S. presidential elections this year, rising concerns over a conflict with Iran and continued concerns with the ongoing trade war with China. With the VIX currently at a low level, there seems to be plenty of room for increased fear in the months and quarters ahead; as always, I suggest investors tread carefully and stay diversified.

Keep your long-term goals and portfolio allocation strategy in tandem.

  1. https://www.investopedia.com/ask/answers/042415/what-average-annual-return-sp-500.asp
  2. https://finance.yahoo.com/
  3. https://fred.stlouisfed.org/
  4. https://www.nber.org/cycles/cyclesmain.html

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