In our Winter 2020 Market Recap, Chief Investment Officer Michael Moriarty and Chris Maxey of the Investments Team address the unusual market performance of 2019 and discuss the looming elephant (or donkey) in the room – the upcoming 2020 election.
Michael Moriarty: We’re coming off of a very fun Q4 and a very fun 2019.
Chris Maxey: I think, somewhat unexpectedly, we saw that 2019 was really a fantastic year. If you look at – just call it a simple 50/50 portfolio – it was the best year that we’ve seen since 1997, and that came out of nowhere. If we think back to the fourth quarter of 2018, we had almost a 20% drawdown in the S&P 500 and a lot of people were entering this past year saying “Oh my gosh, what’s happening? Is this going to become the new normal? Are we setting ourselves up for potentially a bad environment for the markets?” and we enter January 1, 2019 and that was not at all the case. We’re very happy that that was the outcome, we’re certainly not going to say that we didn’t want that to be the case, but I think now we have to reassess and we have to remind ourselves that what occurred last year is not likely to be what we see going forward.
MM: Under the category of expectation setting, I think we need to remind ourselves that even for a diversified portfolio – the 50/50, the 60/40 – it would be very normal to have intra-year drawdowns of 10% or 15%. We’ve gotten spoiled over the last decade, so I often challenge clients to really be honest with themselves. Really explore how you would feel if you open up your quarterly statement or log on to the portal and see a drawdown number of 10, or 12, or 15% and what might you do. If the answer is you are horrified by that eventuality, then perhaps you should talk to your advisor.
CM: Well I think one of the unusual things that occurred last year was it wasn’t just stocks that carried the day. We’ve seen post-2008 that stocks were really one of the reasons that investors have done so well in their blended portfolios, but last year was a combination of stocks and bonds, and it’s pretty rare when we have both things firing at the same time.
MM: That’s right. So, further under the category of expectation setting, Wealthspire and third parties produced their market assumptions for equity markets, for fixed income markets, looking forward 10 years, 20 years, 30 years. And in part because we’ve had such a good last couple years, in part because valuations are probably stretched, looking forward to the next 10 years or the next 20 years, the middle of the assumptions are coming in in the mid-single digits – much lower than what we enjoyed in 2019. And let’s be fair, Chris. The elephant, or the donkey, in the room is the upcoming presidential election.
CM: Yeah, I think it’s one of those things we certainly pay attention to. We’re not ignorant, particularly as one of our offices is right here in the Potomac, Maryland region which is just next door to Washington DC. As we’ve said before, and as I think we will continue to say, investing and politics are one of those things that historically has not mixed. The reason that we say that is because there’s really not much historical precedent that says because this party is in power or because that party is in power, the market is going to do this or that. So, we really try to remind people: Let’s disconnect those things.
MM: Yes, and as I mentioned in the annual letter, I’ve had as many conversations with clients who are bemoaning a potential second Trump term and ask if they should de-risk as I have had conversations with clients bemoaning a potential Sanders or Warren presidency and ask should they de-risk. So it feels like there’s a lot of potential for missteps here.
CM: Absolutely. I think you’re 100% right, so as we think about that, we’re going to pay attention to what the political spectrum is telling us this year, but we’re probably not going to be making stark changes in our portfolios. We’ll certainly pay attention to what’s transpiring, and we’ll try to plan around that, but we are not going to be flipping our portfolios tonight.