2019 Year In Review
While it seems that almost all asset classes put smiles on investor faces, the path there was neither simple nor straightforward. In hindsight, the collaboration from global monetary policy makers (albeit not entirely in harmony), infused liquidity into economies during a period where geopolitical uncertainty seemed to rule most days. Several positive forces, aligned with investment capital fueled by historically low borrowing cost, tempered the simmering anxiety that was threatening to boil over at certain moments in time.
Within our July commentary, we spoke of relatively positive forces that should help stabilize and potentially buoy markets. Remaining calm and disciplined despite some of the tumult in the third and fourth quarters of 2019, enabled investor portfolios to participate in a strong finish for the year.
However, the Pallas view did not come simply. Thinking back, the conversations within our investment team covered expansive topics that included US debt level, yield curve inversion, Brexit, trade wars, consumer spending, global decline of interest rates, oil volatility, dollar strength, repo markets, political uncertainty, investor risk behavior, concentration of US equity growth, value/ growth dichotomy, inflation/disinflation forces, global slowdown, and the quality vs. dividend paradox.
In our efforts to cut through the noise that characterize the past year, we reached several conclusions that supported a sanguine outlook.
- US political upheaval – When we examined the current instability in context of the prior precedents of presidential impeachment, we saw that the underlying fundamentals of the markets (positive or negative) supersede the headlines. In the current period of uncertainty, the fundamental underpinnings of the markets remained positive.
- US and China stalemate – Looking beyond the posturing, it was evident that both sides were motivated to calm the situation while maintaining a strong face. Neither country wished to face the prospects of a domestic economic slowdown resulting from a protracted trade war.
- Monetary policy – Historically, US policy makers have consistently worked towards stabilizing the economic landscape within presidential election years. This has remained the case regardless of incumbent party.
- Credit markets and banking – After examining a multitude of indicators, some in the headlines and some behind the scenes, we felt comfortable that a repeat of the credit crisis in 2008 had low odds of recurring.
- Corporate profitability – As indicated throughout several earnings season, corporate health remains strong. While there had been signs of slowdown in some segments of the economy, much of the news has outpaced investor expectations.
- Consumer health – The consumer balance sheet remains strong, much of it in response to the fresh memories of the credit crisis nearly a decade ago.
Looking forward into 2020, we are overly optimistic to expect a repeat of the 20%+ returns in equities, 8%+ in the bond markets, and 12%+ in commodities.
This ascent in 2019, while beneficial to investors, has not helped plight of active investment managers. Taking a closer view of the survey conducted by Morningstar, we see that active managers have lost further ground in recent years. While easy to attribute this to declining skills within increasingly efficient markets, we should recall how quickly sentiment (and flows) can dramatically revert, pushing active management to the forefront of conversations and outlining the potential importance of intelligent risk diversification coupled with alpha generation.
We expect that 2020 will draw more headlines for returns diversification, as positive trends begin wavering and investors seek avenues beyond equity, bonds, and credits. It’s unlikely that volatility remains near record lows, corporate earnings systematically outpace investor expectations, and passive capital inflows continue unabated. This amplifies the importance of decisions relating to asset allocation, selective use of active management, and sourcing of differentiated alpha in the coming year.
At Pallas Capital Advisors, we are optimistic as we consider what the new year might bring. The global economy remains firmly interwoven despite isolationist rhetoric, technology provides forward progress, and an increasingly louder voice reminds us of our dependence on our planet and our inter-dependence to each other on the world stage.
May you all find peace and prosperity in the new year!
2019 Year in ReviewMarket Commentary - January 2020