Q4 2019 Market Commentary: A Christmas Carol


January 3, 2020

Written by Nathan Erickson, CFA®, CAIA, Managing Partner and Chief Investment Officer

To view and download a PDF of this commentary, click here.

The Charles Dickens classic “A Christmas Carol” is a story we’re all likely familiar with. It is the story of Ebenezer Scrooge, a miser who is visited on Christmas Eve by the ghost of his former business partner Jacob Marley, and the spirits of Christmas Past, Christmas Present, and Christmas Future.  Whether you saw the Disney version as a child with Scrooge McDuck playing Ebenezer Scrooge and Goofy playing Jacob Marley, or perhaps a live theater re-enactment, the story should bring back memories.

The plight of Ebenezer Scrooge was his greed and love of money, which drove away his fiancée and led to his disdain of all things Christmas. The initial visit by the ghost of Jacob Marley is a warning to Scrooge, as Marley shared the same singular focus and now walks the earth shackled with heavy chains and money boxes. He tells Scrooge that if he doesn’t change his ways, he will suffer the same fate. Through the ghosts of Christmas Past, Present, and Future, Scrooge sees the error of his ways and makes drastic changes to avoid the grim future he had been shown.

The end of 2019 brought the close of an incredible decade in investment history. While the S&P 500 performed well above its long-term average, most other asset classes performed well below.

Disclosure: As of 12/31/2019. Historical average is the average annual return since inception of each index; US Stocks = S&P 500 Index (3/31/1936), International Developed Stocks = MSCI EAFE NR (3/31/1986), Emerging Market Socks = MSCI EM GR (6/30/1988), Fixed Income = BloombergBarclays US Aggregate Bond Index (1/1/1976).

For many investors, a decade represents a substantial portion of their investment lifetime and can literally change the way one thinks about investing. With the 20s ahead of us, now is a good time to take a Christmas Carol approach and evaluate our investment mindset through the lens of the past, present, and future.

The Market of Christmas Past (2009)

2009 marked the beginning of the current bull market. After hitting lows in March, nearly all global markets experienced strong recoveries to finish the year. The S&P 500 rallied 65% from its low to finish 2009 up 23.4%. Yet there were few who were calling the beginning of the longest recovery in history. In fact, many economists thought the gains would be temporary, fueled by fiscal policy stimulus that itself was expected to be temporary. Investors also had to consider the impact new Democratic President Barack Obama would have on the economy. The Federal deficit ballooned to $1.4 trillion in 2009, well above the $407 billion projected in the fiscal budget, and nearly 10% of GDP. Economists from Goldman Sachs predicted the Fed wouldn’t increase rates until 2011 due to concerns about deflation (in fact they didn’t raise rates until 2015). Investors had yet to regain trust in the banking system, and unemployment hit 10% in 2009.

Those who were invested in the market at that time may recall how they felt in 2010. Investors who were brave enough to remain invested through the downturn may have felt relieved to see recovery begin, but they were unlikely brimming with confidence and remained uncertain about the years to come. Who could have anticipated that the U.S. would continue to stimulate while the rest of the world focused on austerity, or that the Fed would take such unprecedented measures such as quantitative easing to avoid deflation or another recession? Even the threat of nuclear weapons from North Korea and Soviet military action against Ukraine made little impact on stock market returns. If there’s anything the ghost of Christmas Past can tell us, it’s that no one saw this decade of lopsided U.S. returns coming.

The Market of Christmas Present (2019)

Coming off the heels of 2018, which was the first negative year for the S&P 500 since the financial crisis (down -4.4%), 2019’s market appeared to be bulletproof, finishing up 29%. 2019 endured fear of a global recession, a trade war, Brexit, and the impeachment of the President, and yet the largest peak to trough decline for the year was less than 7%.

Once again, monetary stimulus likely played a part. While the Fed raised interest rates four times in 2018, 2019 saw only interest rate cuts, from 2.25% to 1.50%. While GDP growth remained low, so did unemployment.

Most current investors who also experienced 2007-2009 were likely diversified beyond the S&P 500. Their 2019 return, and likely their ten-year return, was substantially lower than the S&P 500 due to lower returns in international stocks, bonds, or other investments. It can be frustrating to see the S&P 500 perform so well despite multiple concerns in the world and economy, especially for such a long time. Some investors may be reconsidering their current allocations and adding more to their U.S. equity exposure in hopes of keeping pace, or at least closing the gap, as they look to the next ten years.

The Market of Christmas Future (2029)

If this article has illustrated anything, it’s that the future is very unpredictable. No one in 2009 anticipated that markets would do so well over the next decade. Furthermore, there were several reasons in 2019 why markets should have struggled, and yet they didn’t. Regardless of whether investors think they know what the future will bring, or whether they fully admit they have no idea, the fact remains that they have to decide how to allocate their money.

Looking to the decade ahead, consider an alternative framework to making an allocation decision, patterned after Pascal’s wager. Pascal’s wager was an argument for believing in God (full definition here https://en.wikipedia.org/wiki/Pascal%27s_wager), but is really about making choices in the face of uncertainty. The uncertainty investors face over the next decade is the same uncertainty they will always face: will they be better off investing in a concentrated portfolio of the S&P 500 or a diversified portfolio that includes other assets. Historically, we know which answer is right. Diversification won the return contest from 2000-2009, but concentrated S&P 500 won from 2010-2019. We simply cannot know what will win over the next ten years, and yet we must make a choice in how we invest.

Psychological studies have shown that investors’ aversion to loss is about twice as strong as the satisfaction felt from gain. Said another way, most people want to keep what they have more than they want to see it grow. After a decade of watching a diversified portfolio underperform the S&P 500, it may be hard to agree with that statement. The feeling of losing money is a distant memory, but diversified investors’ patience with underperforming the S&P 500 is wearing thin.  Keep in mind, however, that 2000-2009 wasn’t just a win for diversification; it was a full decade of negative returns for the S&P 500, down more than 1% annually. For loss aversion to ring true, it may help to frame it by decade instead of “whenever the market is down”. When investors acknowledge loss aversion as a realistic experience, they can frame their decision making in the decade ahead like this:

An investor who wants to minimize regret wants to avoid the bottom left scenario, as it is the worst outcome. Unless one can see the future and know whether the market will be up or down, the best path to minimize regret is to choose the diversified portfolio. While one may experience disappointment in the short term when his or her portfolio doesn’t keep pace with the market, an interesting thing happens the longer a diversified investor perseveres through short-term disappointment. As time periods stretch out, the performance of a well-diversified portfolio is nearly the same or better than the S&P 500.

Disclosure: As of 12/31/2019. Diversified portfolio is made up with 60% Global Stocks (MSCI ACWI NR) and 40% Fixed Income (BloombergBarclays US Aggregate Bond Index).

More importantly, the bottom left scenario can lead investors to react in the moment. There are many stories of investors who saw their portfolios lose 51% from 2008-2009 or 80%+ in the late 1990s from concentrated tech stock investing, who finally gave up and went to cash and are still not fully invested. When uncertainty is at its highest, panic sets in. Investors who avoid concentration trade the euphoria of short-term 20%+ returns for avoiding moments of panic that lead to bad decisions.

Ebenezer Scrooge’s trip through the past, present, and future reminded him that there was a much bigger picture to consider. As we at MRA look ahead to another decade, we’re encouraged to keep the present in context, remember the past, and admit that we can’t predict the future. We encourage investors to consider the bigger picture as they look back on the 2010s and look ahead to the 2020s. Most investors’ timelines are much longer than a year or even ten years. While we like to keep track and monitor performance over short time periods, success for all will be determined by whether investors meet their long-term investment objectives. As always, we appreciate the trust our clients put in us, and we look forward to continuing to serve you next year and for many years ahead.


Written By

Mark Feldman

Nathan Erickson

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