Market Update January 2020

Return of the Roaring Twenties?

A century ago, the turn of the decade marked the beginning of a notable period in history – “The Roaring Twenties”. The 1920s were characterized by an emergence of social criticism and a distinctive cultural edge. Women’s rights were front and centre, the United States became more anti-immigration in policy, and technology was at the forefront of evolution for businesses. The Progressive movement was focused on addressing problems thought to be caused by industrialization, urbanization, and immigration; the mechanization of business was in full-swing; and equal competition was being promoted through the regulation of monopolies.

As you look around at today’s social and political climate, it all seems pretty familiar, right?

The 1920s were also “roaring” due to rising economic prosperity and an unprecedented bull market in stocks. There was an eight year stretch where stock prices rose by 21% per year.[1] When compounded, that works out to a return of more than 350% over that eight-year span! The length of that bull market ranks second in recorded history, trailing only the current bull market.

Given the obvious parallels to the Roaring Twenties, what should we expect from the decade to come?

We’re not big on crystal-ball gazing. Market-related predictions are virtually impossible to deliver with any degree of accuracy or consistency. However, guided by a long-term perspective, we can provide several potential eventualities:

1. We are likely to see a recession this decade. The last recession in North America ended in 2009, making the 2010s the first decade since the 1850s without an economic recession.¹ Needless to say, this has been an unusually long period of economic growth. Unless you think our current politicians and policymakers are more brilliant than ever (sarcasm intended), history tells us we should expect a recession in the 2020s.
2. The stock market is unlikely to generate a 350% return this decade. The 1920s emerged from a world war and a recession. In contrast, we enter 2020 after a recession-less decade and a steady bull market. We continue to be optimistic on the decade to come, but trees don’t grow to the sky, at least not uninterrupted.
3. Stock markets won’t be any more predictable than they have in the past. Market commentators have been calling for this economic expansion to end seemingly every year since the last recession. They’ve been wrong every year. There are thousands of variables influencing the direction of stock markets at any given time including valuations, the economy, competitive forces, geopolitics, demographics, and many others. We don’t see these variables becoming any more predictable in the decade ahead.

At some point, one of these bold predictions about the end of the expansion will be right, but we prefer to not play this guessing game. Instead, we aim to ensure your short-term needs for funds are managed in safe investments outside of the stock market, while your long-term needs for growth are realized through diversified, highly scrutinized equity investments. We believe this is the wisest approach to reaching your financial goals.

What happened in 2019?

Coming on the heels of a year when almost all asset classes were down, 2019 was a year when almost all asset classes were up. Stocks in both Canada and globally performed well. Bonds had their best year in the last five. Even gold was up by more than 10%. A $100 investment on January 1^st, 2019 would have grown to $123 by the end of the year if invested in Canadian stocks, it would have grown to $107 by year-end if invested in bonds, and it would have grown to $112 by the end of the year if invested in gold.

Growth of $100 in 2019²

This is far from unprecedented. In four of the last 15 years, stocks, bonds and gold have been up by more than 5% in the same year. However, it hasn’t happened since 2010.

Despite all the current negative news, economies around the world are holding up reasonably well. We continue to meet weekly to review markets and discuss the best course of action for client portfolios. We look forward to a happy, healthy, and prosperous 2020!

[1] Myles Zyblock. Investment Junction, January 2020.

[2] Source: Morningstar Direct. Canadian stocks = S&P/TSX Composite Index, Canadian bonds = FTSE Canada Universe Bond Index, Gold = SPDR Gold Trust (CAD)