We hope that the new year has gotten off to a great start for you and your family. The financial markets have continued their upward trajectory as we look to close out January. Companies are continuing to report solid earnings and outlooks as earnings season rolls on. We continue to see strength in the technology space as stalwarts like Apple continue to defy gravity as it rockets to new highs. I wanted to share a few thoughts with you that echo our 4th quarter commentary.
We believe 2020 will be another good year for stocks vs. bonds and cash. The backdrop remains largely positive for stocks as interest rates pull back further with the ten-year Treasury hovering around 1.6% this morning. We believe the “NOA” philosophy remains a large part of the story. “NOA” is a term being thrown around which stands for “No other alternative.” Why would anyone want to own bonds and cash when the dividend yield on stocks like AT&T is 5.4% this morning and similar large cap names are paying 2.2% to 4%. So, we believe by default investors see stocks as a proxy for fixed income. With the Fed signaling they have no plans to move interest rates this year, this situation will not likely improve soon.
The good news: Since 1950 when the S&P 500 is up 20% or more for the year, the following year has been positive 83% of the time with an average gain of 11.2%. Also, consider that earnings growth slowed down in 2019, and this should make the hurdle lower for 2020 earnings estimates. All these data points suggest a higher market by year end. The bad news: while there is room for profit multiples to expand it is not likely to be nearly what it has been. Stocks, as of today, are almost exactly at the average multiple for the last 25 years. We also have seen sentiment gauges spike to the greed level which usually occurs as financial markets top.
We are increasing exposure in our portfolios to international stocks. For the past decade, foreign stocks have significantly lagged the US. The last decade has seen US stocks up over 250% vs. their foreign counterparts at 59%. We believe a rotation is starting to occur especially in Europe and the Emerging Market space.
You may also notice in your portfolio that we have introduced more ETFs into our models. There is finally enough data to support using these lower cost investments versus traditional mutual funds in some instances. Our goal is to provide the best returning investments with the least expense and tax exposure possible. We will be sending out more information regarding these changes as the year progresses.
Here’s hoping for an early spring. Thank you for your continued trust. Call or stop by it you need us.