Every year brings plenty of change, and nowhere is that more obvious than in the markets. In January 2019, we started the year having just survived a difficult December where the market dropped drastically due to recession worries. Then, despite predictions of a year of minimal returns, (1) 2019 gave us a pleasant surprise by delivering a stellar performance. Can we expect the same for 2020?
Less Room For Growth
Most experts are not expecting the same kind of returns in 2020 that we saw in 2019, mainly because we’re starting in a very different place. With such a volatile December in 2018, the markets had plenty of room for improvement in 2019. There simply isn’t as much room for growth in 2020 since we are starting near record highs on the tail of a strong year for both stocks and bonds worldwide.
For example, stocks are more expensive this year than they were last year. One way that is measured is by comparing a stock’s price to profit over the preceding year. Right now, the S&P 500 is trading at 24.7 times its earnings. (2) Last year at this time, it was trading at 16.5 times earnings and the average over the last 2 decades was 17.7 times earnings. (3) We’re starting in a much stronger place this year, so there just isn’t as much room to increase.
Strong & Stable Economy
Even though you shouldn’t expect a repeat of 2019’s amazing gains, that doesn’t mean you need to worry. The economy is still growing, chugging along at a modest rate. There is little risk of a recession in 2020, especially with the progress made on U.S.-China trade and the Federal Reserve’s commitment to keeping interest rates low. One of the biggest unknowns for 2020 is how the presidential election will impact the economy, but with a strong foundation, the impact should not be great or long-lasting.
Analysts are expecting continued growth for 2020 and this next decade, though at slower rates than we saw last year. Vanguard forecasts American stocks to return 3.5% to 5.5% gains over the next decade, which is much lower than we have seen recently. (4) Even if gains are lower, they are still expected to be positive.
What Should You Do?
What does all of this mean for you practically? First of all, it is important to remember that no one has a crystal ball, and any predictions you hear are merely guesses. None of us know for certain what the future holds. No one predicted that 2019 would be the S&P 500’s best year since 2013. (5) We are just making educated guesses and there is no guarantee that what we expect will happen.
In light of that, it is important to have a balanced investment strategy that takes into account all possibilities. A well-diversified portfolio designed with your specific time horizon in mind should be able to meet your needs whether the market returns 2% or 20% in 2020.
The greatest danger in prosperous times like these is for investors to become complacent or greedy and ignore the proven principles of long-term investing. If you want to make sure your portfolio is prepared for whatever 2020 has in store, call our office today at 909-981-1720 or simply click here to schedule a free 15-minute introductory phone call!
About 1 On 1 Financial
1 on 1 Financial is an independent financial advisory firm specializing in guiding working and retired professionals, executives, and business owners along the path to financial well-being. Founded in 1990, we use a team approach to help our clients accumulate wealth, generate income, preserve their life savings, and strategically plan for the distribution of their estate. With more than 50 years of combined experience in the financial services industry, we remain true to our fundamental mission: to provide personalized guidance, treatment, care, and service so our clients can gain control of their future and feel confident in their financial life.
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(2) https://www.multpl.com/s-p-500-pe-ratio/table/by-month
(3) https://www.nytimes.com/2020/01/01/business/wall-street-markets-2020.html
(4) https://www.nytimes.com/2020/01/01/business/wall-street-markets-2020.html
(5) https://www.nytimes.com/2020/01/01/business/wall-street-markets-2020.html