What a difference a year makes. December 2018 was a terrible month for stocks, and 2018 overall saw a 4% decline in the S&P 500. The Fed’s mid-December 2018 hike exacerbated an already-bad month (and quarter), and stocks closed near the lows for the year. For the first time in years, stocks were pricing in a global slowdown and the real possibility of a U.S. recession. We didn’t share the prevailing negativity at the time. It seemed unlikely then – as it does now – that the domestic economy would U-turn into recession with labor markets at “full employment.” Fast forward 12 months, and stocks are making all-time highs, the Fed is on hold indefinitely after lowering rates three times in 2019, and investors are optimistic about earnings growth.

As fears abated, stocks rebounded sharply in 2019. The S&P 500, Dow, and NASDAQ Composite returned 32%, 24%, and 35%, respectively. Keep in mind that roughly half of these gains served to retrace what was lost in the fourth quarter of 2018 when the S&P fell 14%. The other half of the year’s gains put indexes in uncharted territory. Many of the concerns of a year ago were resolved in market-friendly manners, including a dovish Fed, a trade deal, and lack of recession. As we forecasted, markets climbed the “wall of worry” again in 2019.

At the time of this writing, the Dow Jones Industrial Average has crossed 29,000 for the first time.  While we’re not surprised that indexes are at all-time highs, the resilience of the bull market has been rather remarkable. After such a rally in 2019, we would have expected the latest conflict with Iran to be a more persuasive catalyst for profit taking than it was. While specific situations appear to be more benign in the near-term (Iran, Fed inaction, Phase 1 of a trade deal), uncertainties remain. The rally in 2019 suggests that investors are looking for healthy corporate earnings growth. The companies that deliver will maintain valuations; the stocks of those that fall short are vulnerable. Markets are not egregiously overvalued given the low level of interest rates, but valuations have pushed toward the higher end of the historical range. This suggests a less forgiving environment for disappointments.

Handicapping the 2020 elections will intensify throughout the year, and as the predictions fluctuate, stocks within certain sectors, groups, and individual companies will be volatile. Depending on the eventual outcome, there are perhaps tangible structural implications for certain areas of the markets (e.g. healthcare, big tech, banks, energy), but investors generally overestimate the ability of any president to execute the types of reform they espouse on the campaign trail – particularly when pandering to their bases during the nomination process.

We generally don’t make short-term predictions because we don’t invest one year at a time, but 2020 could be another good year for investors. Economic fundamentals are on solid footing; valuations might be slightly stretched but don’t feel frothy; and interest rates will remain low unless inflation spikes unexpectedly. History is also on the bulls’ side. Since 1928, the S&P 500 has returned 25% or more in 17 calendar years. The year after was positive in 12 instances (71% of the time), with an average gain of 7%. The last negative year following a 25%+ gain was 1990.