Market Summary

Investor concerns around the trajectory of global growth, trade and monetary policy improved throughout 2019, leading to strong equity returns for the quarter and for the all of 2019. After steep declines in December 2018, the S&P 500 TR Index rose 9% during the quarter and 31.5% for all of 2019[1]. The gains helped most of the major indexes reach new all-time highs (the small-cap Russell 2000 Index remained roughly 4% below its 2018 peak). 2019 was the S&P 500’s second-largest annual gain in the past 20 years (2013 returned 32%). While U.S. stocks led the way, International stocks also did well as all major indices returned double digits.

Some may think a big year for stocks could mean trouble ahead, but history shows this may not be the case. Since 1950, the S&P 500 has been up more than 30% 12 other times, and the average return the following year was nearly 15%. The S&P 500 produced negative returns only twice following 30% up years, and the U.S. economy slipped into recession only twice as well (same years the S&P 500 had negative returns)[2].

The leadership trends that have been in place for the past five years continued in 2019. Namely, U.S. Large Cap outperformed U.S. Small-Cap, U.S. Growth outperformed U.S. Value, and U.S. stocks outperformed international stocks[3]. Every sector of the S&P 500 posted positive, double-digit returns. Technology led the way with 50% returns and was the best-performing sector of the S&P 500, while Energy (up 12%) was the worst-performing sector.

We are hard-pressed to recall a time when such significant indicators – Large Cap vs. Small-Cap, Value vs. Growth and U.S. vs. International – had a run so lopsidedly in favor of U.S. Growth.  There have only been three times when value has underperformed over ten years in the United States: The Great Depression (1929-1939/40), the Internet Bubble (1989-1999), and most recently[4]. At the end of 2019, U.S. Growth stocks were trading at expensive valuations with high expectations while Value, International and Small Cap stocks traded at more moderate valuations with low expectations.

Bonds, as measured by the Bloomberg Barclays U.S. Aggregate Bond Index, had their best year since 2002 and returned 8.7% for the year. Even precious metals had a good year with gold up 16% and silver up 14%.  Below is a summary of returns for major asset classes[5].

Economic Update

 Overall, the U.S. economy remained on solid ground with few signs of an imminent recession. While the pace of U.S. economic growth slowed in 2019 compared to 2018, recent data indicated that the economy continued to expand at around a 2% growth rate (as measured by GDP). 2019 delivered another pair of records for the history books: (1) as of July 2019, the current economic expansion became U.S. history’s longest[7] and, (2) 2010-2019 is the first calendar decade without a recession[8]. The main concerns heading into the year were rising interest rates, trade concerns and slowing global growth. All three concerns eased by year-end.

First and foremost, the U.S. Federal Reserve cut interest rates three times during the year to 1.5%. Most Central Banks around the world followed the Fed’s lead and lowered interest rates during the year, helping support economic growth and equity prices.

Secondly, essential trade issues showed progress during the year. The U.S. and China announced an agreement on a “Phase one trade deal” in the fourth quarter. The most contentious issues were not part of the deal, so some uncertainty remained. For now, investors welcomed any de-escalation surrounding trade. Also, the U.S.-Mexico-Canada Agreement (USMCA) was signed by the U.S. and Mexico and looks likely to approved by Canada in 2020.

Lastly, low unemployment, low inflation, rising wages, and record-high net worth helped support consumption, which accounts for nearly 70% of the U.S. economy. Housing starts reached a 13-year high. Housing represents a substantial source of household wealth.

We continued to watch for signs of excesses in the economy that could lead to a recession and bring this record bull market to an end. While uncertainties persisted, including a slowdown in manufacturing, a potential peak in jobs growth and a slowdown in corporate profits, there didn’t appear to be any significant cracks in the economy. Overall, the backdrop for stocks appeared to remain favorable, but after a relatively calm and steady stock market advance, a pickup in market volatility would be standard.

This year marks another Presidential election. The election’s impact on the stock market is likely to be a typical media theme in the upcoming year, but if history is any guide, listening to predictions about the direction of equity markets based on election outcomes is likely to be more harmful than helpful.

Be sure to keep an eye out for future blog posts as we discuss the economy and presidential cycle and the markets.

IMPORTANT DISCLOSURES

Leonard Rickey Investment Advisors, PLLC (“LRIA”), is an SEC registered investment adviser located in the State of Washington. Registration does not imply a certain level of skill or training. For information pertaining to the registration status of LRIA, please contact LRIA or refer to the Investment Adviser Public Disclosure website (www.adviserinfo.sec.gov).

This newsletter is provided for general information only and contains information that is not suitable for everyone. As such, nothing herein should be construed as the provision of specific investment advice or recommendations for any individual.  To determine which investments may be appropriate for you, consult your financial advisor prior to investing. All performance referenced herein is historical in nature and is not an indication of or a guarantee of future results. All indices are unmanaged and cannot be invested into directly. Unmanaged index returns do not reflect fees, expenses, or sales charges. Index performance is not indicative of the performance of any investment.

Your experience may vary according to your individual circumstances and there can be no assurance that LRIA will be able to achieve similar results for all clients in comparable situations or that any particular strategy or investment will prove profitable.   As investment returns, inflation, taxes and other economic conditions vary, your actual results may vary significantly. The economic forecasts set forth in the presentation may not develop as predicted and there can be no guarantee that strategies promoted will be successful. There is no guarantee that the views and opinions expressed herein will come to pass. This newsletter contains information derived from third party sources. Although we believe these third-party sources to be reliable, we make no representations as to the accuracy or completeness of any information prepared by any unaffiliated third party incorporated herein, and take no responsibility therefore.

Stock investing includes numerous specific risks including the fluctuations of dividend, loss of principal, and potential illiquidity of the investment in a falling market. International and emerging markets investing involves special risks such as currency fluctuation and political instability and may not be suitable for all investors. Small cap stocks may be subject to a higher degree of risk than more established companies’ securities. The illiquidity of the small cap market may adversely affect the value of these investments. Information presented herein is subject to change without notice and should not be considered as a solicitation to buy or sell any security. This newsletter should not be regarded as a complete analysis of the subjects discussed. Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values and yields will decline as interest rates rise and bonds are subject to availability and change in price. The risks associated with investment-grade corporate bonds are considered significantly higher than those associated with first-class government bonds. The difference between rates for first-class government bonds and investment-grade bonds is called investment-grade spread. The range of this spread is an indicator of the market’s belief in the stability of the economy. The fast price swings in commodities and currencies can result in significant volatility in an investor’s holdings. There is no assurance that the techniques and strategies discussed are suitable for all investors or will yield positive outcomes. The Value investments can perform differently from the market as a whole. They can remain undervalued by the market for long periods of time.

Any projections, forecasts and estimates, including without limitation any statement using “expect” or “believe” or any variation of either term or a similar term, contained here are forward-looking statements and are based upon certain current assumptions, beliefs and expectations that LRIA considers reasonable or that the applicable third parties have identified as such. Forward-looking statements are necessarily speculative in nature, and it can be expected that some or all of the assumptions or beliefs underlying the forward-looking statements will not materialize or will vary significantly from actual results or outcomes. Some important factors that could cause actual results or outcomes to differ materially from those in any forward-looking statements include, among others, changes in interest rates and general economic conditions in the U.S. and globally, changes in the liquidity available in the market, change and volatility in the value of the U.S. dollar, market volatility and distressed credit markets, and other market, financial or legal uncertainties. Consequently, the inclusion of forward-looking statements herein should not be regarded as a representation by LRIA or any other person or entity of the outcomes or results that will be achieved by following any recommendations contained herein. While the forward-looking statements here reflect estimates, expectations and beliefs, they are not guarantees of future performance or outcomes. LRIA has no obligation to update or otherwise revise any forward-looking statements, including any revisions to reflect changes in economic conditions or other circumstances arising after the date hereof or to reflect the occurrence of events (whether anticipated or unanticipated), even if the underlying assumptions do not come to fruition. Opinions expressed herein are subject to change without notice and do not necessarily take into account the particular investment objectives, financial situations, or particular needs of all investors. For additional information about LRIA, including fees and services, please contact us for our Form ADV disclosure brochure using our contact information herein. Please read the disclosure brochure carefully before you invest or send money.

INDEX DEFINITIONS

The Barclays Aggregate Bond Index represents securities that are SEC-registered, taxable, and dollar denominated. The index covers the U.S. investment-grade fixed rate bond market, with index components for government and corporate securities, mortgage pass-through securities, and asset-backed securities.

The Standard & Poor’s 500 Index is a capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries. It cannot be invested into directly.

The Russell 2000 Index is an unmanaged index generally representative of the 2,000 smallest companies in the Russell Index, which represents approximately 10% of the total market capitalization of the Russell 3000 Index.

The MSCI Emerging Markets Index is a float-adjusted market capitalization index that consists of indices of approximately 800 stocks and is designed to measure equity market performance in 23 emerging economies: Brazil, Chile, China, Colombia, Czech Republic, Egypt, Greece, Hungary, India, Indonesia, Korea, Malaysia, Mexico, , Peru, Philippines, Poland, Qatar, Russia, South Africa, Taiwan, Thailand, Turkey, and the United Arab Emirates.

The MSCI EAFE (Europe, Australasia, Far East) Index is a free float-adjusted market capitalization index of approximately 900 stocks and is designed to measure equity market performance in 21 developed market countries outside of North America.

The SG Trend Index is a subset of the SG CTA Index, and follows traders of trend following methodologies. The SG CTA Index is equal weighted, calculates the daily rate of return for a pool of CTAs selected from the larger managers that are open to new investment.

Swiss Re Global Cat Bond Index tracks the aggregate performance of all catastrophe bonds issued offered under Rule 144A. The index captures bonds denominated in any currency, all rated and unrated cat bonds, outstanding perils, and triggers. The index is not exposed to currency risk from non-USD denominated cat bonds.

The Russell 1000® Growth Index measures the performance of those Russell 1000 companies with higher price-to-book ratios and higher forecasted growth values.

The Russell 1000 Value Index measures the performance of those Russell 1000 companies with lower price-to-book ratios and lower forecasted growth values.

The S&P 500® Information Technology comprises those companies included in the S&P 500 that are classified as members of the GICS® information technology sector.

The S&P 500® Energy comprises those companies included in the S&P 500 that are classified as members of the GICS® energy sector.

[1] Data from Morningstar Direct.

[2] LPL Research

[3] U.S. Large Cap defined by S&P 500 TR. U.S Small Cap defined by Russell 2000 TR. U.S. Growth defined by Russell 1000 Growth. U.S Value defined by Russell 1000 Value. U.S. stocks defined by S&P 500 TR. International stocks defined by MSCI EAFE NR.

[4] Dodge & Cox Quarterly Report, 12/31/2019.

[5] Through December 31, 2019. All Returns in U.S. dollars. Data from Morningstar

[6] Alternatives benchmark includes 60% SG Trend Index and 40% Swiss Re Global Cat Bond TR Index.

[7] 126 months and counting. JPMorgan Guide to the Markets, 4^th quarter 2019

[8] Crestmont Research