December 31, 2019


As we close the book on 2019, the fourth quarter was quiet strong, capping a great year and closing out a fantastic decade for investing.  Emerging market stocks and small cap domestic stocks led the way during the fourth quarter, being up 11.84% and 9.94% respectfully.  Large cap domestic stocks followed closely behind, finishing up 9.07%.  Foreign stocks were up 8.17%.  Across the board, stocks posted great results this quarter.  Bond returns were much more subdued, with the aggregate bonds being just slightly positive at 0.18%. Domestic REITs were the bright spot last quarter, but struggled this quarter, being down 1.23%[1].


During 2019, the things that concerned us, such as the U. S. – China trade war, Brexit, the yield curve inversion, monetary policy, and political bickering, did not result in poor investment outcomes.  There was broad-based market strength, as all asset classes performed better than our expectations.  Large cap domestic stocks led the way, posting returns in excess of 30%.  Small cap domestic stocks followed, being up more than 25%.  Although not as strong, foreign stocks still posted returns north of 22%. While very pleased with the equity returns this year, we were most surprised at the strong returns of the bond market.  Aided by the Federal Reserve (Fed) lowering interest rates, aggregate bonds were up more than 8.5%, while foreign bonds were up almost 6%[2].


The investment markets received some clarity this quarter around several issues that have been weighing on us.  The direction that the United Kingdom will be taking in regard to Brexit is now known, and it appears that the U. S. and China have reached a small but meaningful cease-fire in their trade war.  There is further optimism that the U. S. and China will engage in a second round of negotiations in the near future too.  Additionally, Fed policy is very accommodating for future economic growth, and unemployment remains at historically low levels.


An interesting aspect of the great stock market returns this year is that much of it is related to where we began in 2019.  As you might recall, we closed 2018 with a very big slide in December, pushing the markets negative. The S&P 500 Index was just 0.20% from an official bear market, which is defined as a 20% drop from the previous peak.  In 2018, the S&P 500 Index closed down more than 6% for the year[3].  When we normalize the volatile swing, basically netting the fourth quarter of 2018 and the first quarter of 2019 performance, the S&P 500 Index would really only be up about 10% this year.  This is much more inline with expectations than returns in excess of 30%[4].


In reflecting back on the last decade of investing, we are astonished by the boom.  It started at the depths of one of the worst economic crises in history; by most measures, it was the worst financial crisis since the Great Depression, earning the name Great Recession.  Now, as we close the decade, it is the longest-running bull market ever[5].


There are few certainties in investing, but one is that we will see another bear market.  It is not reasonable to try to predict when or how deep it will be.  What is prudent though, is to make certain that your investment allocation matches your financial plan so that you can be prepared to weather the downturn appropriately. By having a properly allocated portfolio, the need to sell assets during downturns at unfavorable prices is reduced.


Our outlook remains cautious.  While we do not believe a recession is looming, we feel that investment returns will be far more muted this year. The U.S. has accommodative monetary and fiscal policies, low unemployment, and positive consumer sentiment and spending.  Despite our cautious outlook, these are reasons we are comfortable in the near-term potential for the investment markets.


Warmest regards,


The Waller Team



The opinions voiced in this letter are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. The economic forecasts set forth in this printing may not develop as predicted and there can be no guarantee that strategies promoted will be successful. Stock investing involves risks, including loss of principal. Bond values will decline as interest rates rise and bonds are subject to availability and changes in price. There is no guarantee that a diversified portfolio will enhance overall return or outperform a non-diversified portfolio. Diversification does not protect against market risk.


[1] 2 Morningstar Office: Large Cap U.S. stocks as measured by the S&P 500 Index, Medium Cap U.S. stocks as measured by the S&P Mid Cap Index and Small Cap U.S. stocks by the Russell 2000 Index. Foreign stocks as measured by the MSCI EAFE ND Index and the Emerging market stocks measured by the MSCI EM ND Index. Fixed Income/Bonds as measured by the Barclays U.S. Aggregate Bond Index, Barclays Municipal Index, and the Citi World Government Bond Index. Real estate as measured by the Dow Jones U.S. Select REIT Index. Commodities as measured by the Bloomberg Commodity Index. Inflation as measured by the U.S. BLS Consumer Price Index All Urban SA 1982-1984.


[4] Power, William (2020 January). A Happy Year: U. S. Stock Funds Rose 28.3% in 2019. Wall Street Journal, CCLXXV No. 4, p. R2