By Ian N. Breusch, CFA, Chief Investment Officer
The Sanibel Captiva Trust Company
The past year has proven to be very profitable for most investors regardless of their specific asset allocation. U.S. stock and bond markets rallied throughout most of the year. International stock markets also performed well in 2019. Stock markets were propelled higher as a result of a strong economic underpinning highlighted by low unemployment, modest wage increases, and continued GDP growth.
Year over year, while corporate earnings slowed through the middle part of 2019, results were slightly better than what analysts expected late last year. As we look to next year, expectations for corporate earnings growth are increasing, particularly in the latter half of 2020. These expectations can obviously change, but we must acknowledge the progress made on two important risks we’ve highlighted over the past year – monetary (interest rate) policy and tariff discussions.
Twelve months ago, we were operating under a monetary policy regime that indicated continued, methodical movements higher in the Federal Funds rate. The broader bond market clearly disagreed and sold off longer-term bonds creating an inversion in the yield curve (meaning shorter-term bonds were yielding more than longer-term bonds). This caused additional worry that a recession was likely given the correlation between inverted yield curves and economic recessions throughout history. There was much conjecture about what the Federal Reserve’s response should have been, but ultimately the Fed decided to take action by lowering interest rates on three separate occasions during 2019. Stock markets and interest rates responded, which in turn, re-inflated the yield curve. We do not expect further rate decreases during 2020.
Tariff discussions between the U.S. and China were a roller coaster ride through much of 2019. However, progress seems to have been made when the U.S. and China agreed to a “Phase 1” deal. While this is certainly positive news, implementation ultimately matters. At the risk of sounding cynical, it remains quite possible that China sees very little incentive to acquiesce during an election year. Nonetheless, we acknowledge there is less uncertainty now than there was at the beginning of 2019, which bodes well for 2020.
Given the improving landscape and the reduced risk tied to monetary policy and tariff discussions, we are cautiously optimistic as we head into next year. While there is much to be optimistic about, we also know that global equity markets have rallied by more than 20% over the past year. Undoubtedly, 2020 will bring its own set of challenges. At a minimum, we expect more volatility given the overhang of the election year. Therefore, we will be focusing our efforts on the things we can control, such as our clients’ asset allocations among high-quality stocks and bonds, as well as our individual research efforts. Our research process will remain focused on sourcing high-quality investments trading at attractive prices relative to the overall opportunity set.
Asset allocation, an emphasis on quality, and attention to pricing will be even more vital in 2020 to ensuring we achieve (and hopefully exceed) our clients’ long-term investment goals.
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The Sanibel Captiva Trust Company is an independent trust company with $2.4 billion in assets under management that provides family office and wealth management services, including investment management, trust administration and financial counsel to high net worth individuals, families, businesses, foundations and endowments. Founded in 2001 as a state-chartered independent trust company, the firm is focused on wealth management services that are absolute-return oriented and performance driven. Each portfolio is separately managed and customized specifically to the client’s yield and cash-flow requirements. The Naples Trust Company and The Tampa Bay Trust Company are divisions of The Sanibel Captiva Trust Company. Offices in Sanibel-Captiva, Naples, Tampa, Belleair-Clearwater and Tarpon Springs. http://www.sancaptrustco.com
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