By Ash Toumayants
A new year often motivates us to change, whether that’s our habits, our schedules, or our goals. Well, the markets like to change year to year as well. Just take a look at last January, when we had just survived a harrowing December where the market dropped drastically due to recession worries. That’s not the story right now, as we have come off of a year of unexpected, stellar performance. What does that mean for 2020? Will we see a repeat performance of last year or something completely different?
The Growth Factor
Most experts are not expecting the same kinds 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.
Right now, the S&P 500 is trading at 21.1 times its earnings. 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. (1) We’re starting in a much stronger place this year, so there just isn’t as much room to increase.
Economic Strength
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. (2) 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. No one predicted that 2019 would be the S&P 500’s best year since 2013, (3) and none of us know for certain what the future holds. 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 that your portfolio is prepared for whatever 2020 has in store, you can complete a complimentary risk assessment here, email [email protected], or click here to request a meeting using our online system!
About Ash
Ash Toumayants is a financial advisor and the founder of Strong Tower Associates. For over a decade, he has helped hardworking people across Central Pennsylvania prepare for retirement. Fueled by a passion for helping people see through the veil of confusion that shrouds the financial world, his goal is to educate his clients so they can make more sound choices regarding their financial future. A Penn State graduate, he currently lives in State College with his lovely wife, Noelle, and their four adorable children. Learn more by connecting with Ash on LinkedIn or emailing [email protected].
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(1) https://www.nytimes.com/2020/01/01/business/wall-street-markets-2020.html
(2) https://www.nytimes.com/2020/01/01/business/wall-street-markets-2020.html
(3) https://www.nytimes.com/2020/01/01/business/wall-street-markets-2020.html