2019 Q4: The market has no memory.

Posted by on Jan 5, 2020 in MFA Insights

There were lessons learned in 2019 that apply not only to the year just passed but to the recently ended decade as well. Having just completed a high-return year at the end of what turned out to be a pretty normal decade, it is instructive to go back to where we started.

A year ago, January of 2019, began in the shadow of a severe multi-week market decline in the prior year that erased all the gains of 2018. Experts on the air and in print reminded us that the bull market was long in the tooth and due for a reprieve (as it turns out, that had already happened). Interest rates had fallen and were “sure” to rise at some point. Others predicted the start of a recession.

When things feel ominous, people get nervous. Some had a “feeling” the bull market was finally on its way out. We all know what happened. Global equity markets finished 2019 up more than 25%1 and fixed income gained more than 8%.1

Missing out on big growth has as much impact on a portfolio as losing that amount. How long does it take to make that kind of loss back? And how is someone who got out supposed to know when to get back in?

A decade ago, in January of 2010, the recovery from the financial crisis was underway but long-term confidence was clearly shaken. The banking system was still in recovery. Appetite for stocks was generally low. As it turns out, it was a pretty good time to buy.

Markets act as a pricing machine for risky assets. The price today reflects all we know about the expected risks and return from a particular investment. There is uncertainty because we can’t predict the future, which makes sense if you think about it. If the market is doing its job, prices ought to be set at a level where you experience anxiety (due to uncertainty). It’s unrealistic to think the market would ever offer an obvious and comfortable time to “get in”. If it did, there would be no risk and no reward.

So, what did we learn about investments from the past year and decade? Not much new, really. Diversification still works, which means winners and losers can and often do trade places. After lagging for ten years (2000-2009) in a period that was labeled at the time as the “lost decade” for stocks, large US Companies emerged as market leaders in the next ten years. What will lead the next ten years?

The most valuable lessons learned over the past decade are what we learned about ourselves and our relationship with market volatility. As we patiently observe our long-term returns in the making, we learn to reduce our anxiety by accepting the market’s inevitable ups and downs. We hope you’ll take some time to reflect on where you are now versus ten years ago. A decade-long benchmark is a calming and empowering way to envision where the next ten years will take us. We look forward to traveling that path together.

Happy New Year!