This Month’s Newsletter

The Roaring (or Boring?) 20's Are Here! Join our Monthly Newsletter January 2020

Carl W. Hafele, CFA, CPA

Co-CIO, Principal

A Historical Perspective

As we enter a new decade, what’s in store for investors? Will it be a repeat of the 2010-2019 decade of ~11% annual rate of return from stocks – normal by historic standards as we rebounded from the Great Recession? Or will it be rosier a la the 1980’s and 1990’s (our generation’s Roaring 20’s), where we had 17-18% per year driven by multiple expansions? Or could we see subpar returns of 0-5% per year a la the 1960’s, 1970’s and 2000’s – all driven by multiple contractions?

A Look Back at 2019

Let’s first take a brief look at 2019. After a not-so-fun 2018 where virtually all asset class returns were negative driven by a hawkish Fed, 2019 returns were a mirror image yet on steroids. Traditional asset classes of stocks and bonds returned 28% and 10% respectfully, while non-traditional classes of real estate and hedge funds returned ~27% and ~9%. Economic growth slowed but still surpassed 2%. Earnings expectations were very low and earnings growth was virtually flat in 2019. The Fed “did a 180” and ceased its professed “return to normalcy” by not only ceasing raising rates, but instead lowered rates. In addition, the Fed stopped the balance sheet shrinking process. All good for investors! As we predicted in Jan 2019, interest rates declined, earnings growth was mute and lower beginning multiples would lead to a very nice year. Voilà!

A Look Back at 2010-2019

For the decade 2010-2019, returns were slightly above average – bettering most of our expectations. It will go down in history as the only decade that we did not experience a recession. We attribute the majority of the advances to former Fed chairman Ben Bernanke’s unprecedented policies associated with the Fed’s quantitative easings (printing money). He remains truly an economic guru of epic proportion, and we thank him for spending decades studying how to avoid another Great Depression.

A Look Forward for 2020

For 2020, we expect more muted but positive returns driven by modest profit advancements and a quiet Fed. We see very few signs of a recession and don’t forget we remain in a secular bull market. Numerous indicators that we monitor are far from forecasting a bear market. GDP growth, inflation and the US Treasury 10-year all look to be 1.5% - 2.3% for the year.

Valuations and possible political surprises could temper returns. Economic growth and increasing earnings normally beat politics. Historically since WWI, incumbents always win if there is no recession in the president’s last two years in office. However, an unlikely experiment with socialism would unquestionably change the rules of investing and more.

A Look Forward for 2020-2019

So, will we have the Roaring 20’s or the Boring 20’s? How about somewhere in between? Higher than average decade returns always begin with low valuation levels and solid economic policies. Markets are fairly valued to slightly expensive, and economic policies will be in flux due to deficits and social unrest in the 2020’s.

Some say we could have the Turbulent Twenties, as entitlements associated with the Baby Boomer tsunami shift into high gear. The reality of the math associated with Social Security and Medicare may very well ignite further polarity amongst the left and the right and the young and the old. Social challenges are likely to head to a boiling point this decade, resulting in an overdue overhaul of traditional paradigms.

Long Range Rates of Return

We believe that investing should include looking at projected returns from the asset classes, not historic rear view mirror returns. Our 7-10 year projected annual rates of return are a conglomeration of our country’s largest financial institutions, endowment funds and consulting firms.

As always, we have a strong conviction that investors utilize both the traditional asset classes of bonds and stocks as well as alternative assets including hedge funds and real assets. The result is a similar or better return while taking significantly lower levels of risk with a lower correlation to the market over a market cycle.

Carl W. Hafele, CFA, CPA, is Co-Chief Investment Officer and Principal at Lanier Asset Management. He is also an instructor in Finance and Economics for the MBA program at Bellarmine University.