Last year was a very good one for investors. Nearly all major asset classes such as stocks, bonds, and precious metals produced positive returns in 2019.
The Dow Jones Industrial Average was higher by over 20 percent and higher-risk technology stocks were up even more. Very few Wall Street experts predicted that 2019 would be such a strong year for stocks and bonds.
So what happened throughout 2019 that led to these results?
The U.S. economy continued to perform well, led by consumer spending, a strong housing market, historically low unemployment, and the Federal Reserve reducing interest rates. All of this economic success was intertwined with impeachment, trade tangles and tariffs, and increasing political jockeying aimed at the 2020 election cycle.
While 2019 was a good year, remember that it started on a low note as the stock markets closed out 2018 down nearly 20 percent. When taking this decline into the market returns of 2019, the returns were reasonable and truly not too far off from longer-term trends.
Here is an example. From September 2018 through December 31, 2019, the stock market rose about 11 percent — or very close to historical averages. But the year-end 2018 market decline and the strong rebound in 2019 skews the year-to-year data quite a bit. It is a reminder why it is important to look at investing on a longer-term perspective as opposed to quarter-to-quarter or even year-to-year.
For many investors, a solid strategy might be to rebalance in up and down markets strategically – not trying to time markets. Better to make adjustments based on overall cash flow needs, time horizon, and risk tolerance. One size may not fit all in how the portfolio is structured, but the themes should remain consistent.
This strategy may be applicable for 2020 as well.
A balanced strategy means avoiding massive portfolio changes based on political views.
The election will occur, one candidate will win, and the stock and bond markets will open as usual the following day. Challenges will be handled, some will go away, new ones will emerge, and headlines will continue to be powerful. While this may be oversimplification, sometimes a simple view can be calming, helpful, and straightforward.
We should expect the stock market to have volatility in 2020 as the market does in any year. We might have a little more or a little less compared to the last few years.
Rebalancing is important when markets fall and when they jump higher.
If your stock allocation target is 60 percent but has grown to 70 percent because of strong markets, rebalancing back to 60 percent stocks can reduce volatility risk.
In spite of many challenges and with a supportive Fed, the U.S. economy remains in pretty good shape.