If you turn back the calendar to last December (2018) things in the investment world were drastically different.

The Federal Reserve had raised interest rates several times during the year and in December not only raised interest rates but also forecast 2-3 interest rate increases for 2019. The stock market responded by having a negative year. In particular the 4th quarter of 2018 had experienced a decline in the S & P 500 of approximately 13% and December alone had a decline of 9%.

At the very end of 2018 and, the beginning of 2019 we began to hear talk from the Federal Reserve about keeping interest rates steady and not doing anymore increases. This is all it took for the stock market to be off to the races. January 2019 turned out to be a stellar month and the trend largely continued form there with only a few months during the year showing declines, none of which were what we would call significant. As it turns out not only did the Federal Reserve not increase interest rates in 2019, they ended up cutting interest rates 3 times. This was an astounding turn of events. Clearly the stock market in 2018 was communicating to the Fed that they had gone too far with interest rate increases and was relieved if not euphoric to see that the tightening cycle was done (for now). When the year settled out the S & P 500 had returned nearly 29% one of the best years on record for the index.

At the very end of 2018 and, the beginning of 2019 we began to hear talk from the Federal Reserve about keeping interest rates steady and not doing anymore increases. This is all it took for the stock market to be off to the races. January 2019 turned out to be a stellar month and the trend largely continued form there with only a few months during the year showing declines, none of which were what we would call significant. As it turns out not only did the Federal Reserve not increase interest rates in 2019, they ended up cutting interest rates 3 times. This was an astounding turn of events. Clearly the stock market in 2018 was communicating to the Fed that they had gone too far with interest rate increases and was relieved if not euphoric to see that the tightening cycle was done (for now).

When the year settled out the S & P 500 had returned nearly 29% one of the best years on record for the index. From a portfolio standpoint we went from an environment in 2018 where nearly all asset classes were down to one where nearly all asset classes were up in 2019. Balanced portfolios in 2018 experienced declines in the 4-8% range and vice versa experienced gains in the 10-18% range for 2019.

As we look into 2020, there is little doubt in our mind that the Federal Reserve is largely in control of this ship. In addition to the interest rate cuts in 2019 they have also started a bond buyback program similar to the ones they used exiting the financial crisis of 2008. They have also instituted other measures of economic and monetary support that are beyond the scope of this letter. Suffice to say that the “Fed is your friend” has been a very true statement. Likely, as the Fed goes so goes the market.

We still feel that caution is in order in the coming year. What happens if (when) the Fed decides to remove the help in the form of monetary easing? Plus, we are in the midst of the longest economic cycle in history and these cycles come to an end (eventually). In addition, political tensions are running high and there is an election which is bound to cause some market fluctuation.
We find in times like these investors generally fall into one of two categories. The first is wanting to get more aggressive due to the great year we just had and fear of missing out on more growth or second wanting to get way to defensive due to the potential risks. Typically, neither is correct. We prefer to stay objective and let things unfold and adjust portfolios based on the economic and technical indicators that we monitor.

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