The year 2019 was dominated by
- US – China trade war
- Weak manufacturing data and the fear for a recession
- Dovisch central banks
- Brexit negotiations
- Towards the end of the year: diminishing uncertainty around some of the above main topics.
2019 was a good year for stocks. When we look at the S&P, we see that the return in 2019 is around 28%. The end of 2018 was really bad for the markets and just before Christmas 2018, the market did crash heavily. These losses came back quickly in January 2019. We should not forget that 2018 was a bad year for stocks. Though, 2018 & 2019 together posted above average returns. An investor in the S&P starting at the 1st of January 2018, would have made 9.5% annual returns till today. That is a bit above the long term average and also quite a bit higher than the returns we have seen in Europe. The S&P outperformed.
Predicting a recession would have been expensive
Maybe for every investor, but definitely for the average investor: trying to predict a stock market crash is very difficult. On average, the stock markets gives you a 8% return for being long. When you try to predict a market crash, your timing is essential. If you think it will happen next year and it only happens in 2024, you already miss 4 years of on average 8% returns. Then the market has to crash very hard to make up for that.
Peter Lynch, one of the most well-known investors of all times quoted it nicely:
” Far more money has been lost by investors trying to anticipate corrections, than lost in the corrections themselves.”
When you take a bit of time to think about this, I think you would agree.
At the end of 2018 and in the beginning of 2019, quite some investors were talking about a recession and the high likelyhood it would happen. They based their opinion on the geopolitical tensions and the inverted yield curve. But then the market overcame these tensions and the central banks became very dovish again. The FED does not want stock market turbulence and the ECB still needs to get the inflation back in the economy. Moreover Trump closed a first deal with China. The market is dynamic and somehow it always finds a way back up. Crises like the one in 2008 are rare but still in the memory of people. But if you would have bought before the crisis in 2008 and kept your stocks during the crisis and still owe them today, you would have made a satisfying annual return of nearly 9% and your investment nearly trippled in value!
2020 to be dominated by US elections
Currently the stock market sentiment is very good and is expected to stay good for a while. Trump cannot risk significant market turbulence and wants to boost the economy once more: to get reelected. Moreover, profit margins for companies are high, unemployment is low and there are no significant structural/system risks in the money system at the moment.
The market can react heavily in the short term on a Democratic presidency. Democrats are being seen as negative for stocks while Trump is being seen as relatively good for stocks. Especially if Bernie Sanders or Elisabeth Warren would become president, the stock market might sell off heavily just after the elections.
Though, on the longer term it has been found that it does not matter much for the stock market if a Democrat or a Republican is in power. Depending on their policy it can matter for certain stock sectors, but for the stock market (S&P) as a whole it does not matter much on the medium/longer term.
Long term message
The long-term message is: do not try to outsmart the stock market and stay invested with the money you do not need on the short term. It is as easy as that. Make sure you diversify the portfolio and understand the risks.