* 2019 turned out to be an exceptional year for the financial and investment markets, with most asset classes posting above average returns.
* This turned out to be a mirror image of calendar year 2018, when most asset classes were flat or negative.
* Many of the recent, near term risks to the economy seem to have abated over the last few months, with the Federal Reserve Bank cutting interest rates and several long-awaited trade agreements getting finalized or approved.
* Historically, great years like 2019 are typically followed by a reasonably good and positive year. However, there are still political/geopolitical tensions present and markets are relatively fully valued.
* Against this backdrop the committee is cautiously optimistic that diversified portfolios will continue to post modest but positive returns in the upcoming calendar year, albeit with bouts of volatility.
The joint investment committee of Horizon and Impel Wealth Management met the afternoon of January 13th. All of our committee members were happy to report that our investment models did very well in calendar year 2019, on both an absolute basis and relative to their risk adjusted benchmarks. This was largely due to a significant upturn in the market that started in August of 2019 and accelerated during most of the 4th quarter. It is important to remember that trees do not grow to the sky and markets will not continue going up in straight lines like we have seen recently. Therefore, we would not be surprised to see some period of increased volatility or pullback in the markets.
It is important to remember that you make money in the markets by buying low and selling high. Anytime the market moves toward record levels you should look to create any cash that you would need for short term funding needs, so that you do not have to risk selling during times of dislocation or volatility. Secondly, you should consider any pullbacks in the market opportunities to buy low and accumulate more shares when prices are down.
There are a number of economic factors that have resolved themselves somewhat favorably over the last six months that caused the committee to believe that a recession is not imminent in 2020. These include the Federal Reserve Bank cutting interest rates three times in the second half of 2019. It is important to remember that monetary policy works on a six to nine-month flag basis. This sets up the economy to potentially accelerate in the second quarter of 2020. A recession will still happen at some point, however, it is likely further out on the horizon today than it was a few months ago.
In addition to this we have seen progress made on the trade front on two areas. First of all, President Trump is slated to sign the phase one China trade deal on January 15th. Even if this is not the end all be all trade agreement that President Trump and his perpetual hyperbole states it is, at least China and the U.S. are not hitting each other with new tariffs. Additionally, the United States Mexico Canada Trade Accord, which had sat on Speaker Pelosi's desk for more than a year, was finally passed, just hours after they voted on the impeachment of President Trump. It is making its way through the Senate committees, where it is expected to be passed by the full Senate later this month. What many people are not aware of is that Mexico is our biggest trading partner, with trade in excess of $1.3T per year. Canada is our second biggest trading partner at $1.2T a year. The more than $2.5T of combined trade, makes the USMCA five times larger than our trade with China, which is in the neighborhood of $550B a year. The increased trade flow without tariffs and supply-chain barriers should be additive to ALL North American economies.
Against this backdrop, we are still aware that there is potential for political and geopolitical volatility as it relates to the upcoming impeachment, the presidential primary season, and the potential for geopolitical events related to China, North Korea, Russia, or Iran. We also know the markets are relatively fully valued. Markets that are at this level need stronger earnings and economic growth to continue going up. We will continue to watch these factors closely as a committee and stand ready to make adjustments if or when necessary for the benefit our clients.
While we are happy with the results of the last year, we are not resting on our laurels. We are diligently watching the markets, the economy, and the political environment to help shepherd the funds that you entrust to our care. It is a responsibility that we take very seriously. Should you have any questions regarding this commentary, please do not hesitate to reach out to your financial advisor. Thanks, and have a great day.
