Quarterly Review-January 2020

Happy New Year!

2019 was a very good year for investors

Both stocks and bonds advanced during the year with the S&P 500 up 31% and the Barclays Aggregate bond index up 8.7%. After a year like 2019, everyone is interested in what will happen in 2020. Both statistically and fundamentally the data point to continued gains in the year ahead. Even with that belief, we recommend that you keep the positive emotions in check, prudently assessing your current financial situation to set an appropriate asset allocation. Historically, years following big stock market gains are generally good for investors. Over the past 70 years, the S&P 500 recorded a 30% or better return 13 times. The years that followed provided an average 15% return as shown on the following chart:

Though this can provide some comfort, past history is not an accurate predictor of the future.

Economic fundamentals look reasonably good. Over the past few years, we have seen U.S. GDP growth hovering in the mid 2% range with the latest third quarter report at 2.1%1. The economy is being driven by consumer spending, which represents about two-thirds of GDP. The business investment portion of GDP remains weak2. The consumer remains strong because more people have jobs and wages are increasing. The number of people working in the U.S. (civilian labor force) is 164.6 million people, the largest number ever3. Unemployment rate at 3.5% is at historic lows3. Wage growth has been very slow but on an upward trend with hourly earnings up 0.6% in December from the year earlier4.

With good employment and increasing wages, Consumer Sentiment is naturally good. As you can see on the chart above, consumer sentiment is as strong as it has been since 2005, but below the positive feelings that consumers had in the late 1990s. Employees, with the ability and confidence to spend, drive the consumption component of GDP.

In our opinion, the stock market will have more volatility than the economy in 2020 based on what we know today. It’s the “unknowns” that can cause problems. News headlines and perceptions drive stock prices up and down even if the end-result is benign. The China trade dispute, a major concern in the fourth quarter, seems to have become a “back-burner” issue with the signing of a Phase 1 agreement. The killing of Iranian leader Qassem Soleimani and subsequent missile attacks on Iraq military bases caused concerns over potential escalation or even war between the U.S. and Iran. The tensions seem to have dissipated for the time being. 2020 is an election year, which is likely to create some headlines and concerns. In the background, we have an ever-increasing federal debt and deficit, which someday will need to be paid. Any one of these, and a host of others, can drive the stock market up or down on a weekly basis. However, we believe the economy is fundamentally stable and should support the stock market in the medium term moving forward.

Advice as we enter the new year:

1. Be thoughtful about your asset allocation and keep emotions in check. After a good year like 2019, many of us think the party will continue and don’t want to miss out on the next upward move of the market. This has become so common that there’s even an acronym “FOMO” Fear Of Missing Out, that has been coined for the behavior. Our emotions also cause us to underweight the risk that at some point the stock market will decline. It’s important to keep a level head and steady hand, setting our portfolio allocations for the long-term.

2. With a historically good return in 2019, your financial plan is likely to look better than it did a year ago. Because we prefer to be conservative in our planning, we generally assume portfolio investments earn 5% annually over the long run. Since 2019’s returns were much better than our planning guideline of 5%, you are likely in a better financial position than you expected. The opposite will be true in years when the market declines. Overall, we still believe that a long-term forecast of 5% return is prudent. With this major deviation from forecast, revisiting your financial plan could be a valuable exercise. If you have not yet put together a comprehensive financial plan, now is a good time to get started.

Financial planning makes a difference because it provides a clear path for you to achieve your personal life goals. Instead of leaving things to chance, you’ll have a systematic, organized map of what you need to be doing to achieve the goals that are important to you. At Lucas Capital, we are happy to develop a comprehensive financial plan as part of the service we offer to clients.

3. Contribute to your retirement account. The deadline for contributions to your IRAs, Roth IRA and SEP IRAs is when you file your federal tax return. For most of us, it’s April 15, 2020. If you haven’t made your contributions yet for 2019, make sure that you do.

We value the relationship we have with each of our clients and are here to serve your financial needs. If you have friends or family members who would benefit from our service, please let them know about Lucas Capital.

 

Sources:

  1. https://www.bea.gov/news/glance
  2. https://www.marketwatch.com/story/third-quarter-gdp-left-at-21-stronger-consumer-spending-offset-by-weaker-business-investment-2019-12-20
  3. https://data.bls.gov/cgi-bin/surveymost?bls
  4. https://www.bls.gov/news.release/pdf/realer.pdf A copy of Lucas Capital Management, LLC’s ADV is always available upon request.

NOTE: This report has been prepared for the discretionary account clients of Lucas Capital Management LLC (LCM) only and is not intended for the general public. The intention of this material is to provide the basis for investment decisions made by LCM on your behalf. The opinions expressed in this report are those of Lucas Capital Management. Information contained herein is based on sources we believe to be reliable, but is not necessarily complete and its accuracy cannot be guaranteed. Any opinions are subject to change without notice. This report is for informational purposes only and is not intended as an offer to sell or a solicitation to buy securities. This report may not be reproduced or distributed without our permission and is a service provided exclusively for our clients. Lucas Capital Management and its affiliated companies and/or associated persons may, from time to time, have positions in, or options on the securities discussed herein and may make purchases/sales while this report is in circulation. More information is available upon request.