If someone had told you on January 1st , 2019 that the year would start off with fears of an economic recession, a trade dispute with China, and that the President would be impeached you would have thought it might be a recipe for a bear market. Well it does not get much better than 2019, with the S&P 500 posting gains in ten of twelve months for an overall advance of +27.11%. It has been the best annual return since 2013. Whether you owned Small or Large Cap stocks, domestic or international stocks, the chances are good that you ended up with returns of more than 20% from your stock portfolios.
So where is the market headed in 2020? If you are looking for a year-end target from us, forget it. We do not pretend to know where the S&P 500 will be trading 12 months from now (as if the last 12 months does not prove the point). In fact, Wall Street professionals’ year-end targets are almost always wrong. Generally speaking, Washington remains a mess, but encouragingly Congress passed the U.S., Mexico, Canada Trade Agreement and a 2020 spending bill to avert a government shutdown. With respect to trade, the U.S. and China have agreed on a phase one trade deal. Meanwhile the Federal Reserve has stated that it will not increase interest rates until inflation becomes significant and persistent. These are all positive tailwinds going into 2020.
We do not know when the next market decline will occur; however, practicing patience in your investment strategy and keeping a long-term perspective is more likely to increase the probability of your success. We like to remind clients that investing is a long-run pursuit. Most of us are investing for horizons of five years or more. Time is an investor’s friend. A longer investment horizon decreases volatility and the probability of negative returns. Temporary market pullbacks occur periodically. We know that stock prices change much more frequently than companies’ underlying fundamentals. Fundamentals are the predominant driver of long-term investment returns.
Cardinal Capital’s value-oriented investment methodology helps to improve the chance of realizing your long-term goals through stock selection. We find that companies with strength of balance sheets and free cash flows are better able to weather market declines. A lower volatility portfolio dove-tails nicely with a long-term investment horizon because it allows you to reduce risk and remain invested for the long-run – participating in gains while the market rises, but decreasing losses when the market falls.