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Market Commentary: January 2020

Understanding 2019’s Leftovers to Plan for 2020

By: Peter Nielsen, MBA, CFA®

We often find that financial writers gain a following by identifying as bullish or bearish. Either the prognosticator is optimistic about investment prospects or their forecast calls for gloom and doom. These positions are often presented in a way that suggests deep intellect even as the likelihood of extreme outcomes is remote. Since money tends to be an emotional topic, these writers garner a lot of interest and attention, while more moderate forecasts tend to be overlooked. Our outlook for 2020 is balanced, we do not anticipate the same high returns we experienced in 2019 nor do we foresee the makings of a financial crisis.

Why are some analysts predicting a recession?

We think that much of the recession talk is driven by the length of this current economic cycle. At just over ten years, this is the longest economic expansion on record. This fact alone has many analysts waiting for the other shoe to drop. However, recessions are becoming less frequent. Early in the 20th century recessions occurred about every five years, but more recently they’ve been happening every eleven years. Some believe the reason is a shift away from a manufacturing-based economy to a service-based economy. Whether or not this is the cause, using historical averages is an ineffective way to forecast economic downturns.

One of the odd developments in this economic expansion has been wage growth, which remains sluggish despite extremely low unemployment. However, from our perspective, if the economy continues to churn out jobs and consumer balance sheets remain healthy as expected, economic development is unlikely to shift into reverse.

Why did stocks rise as much as they did in 2019?

2019’s returns were a product of the dismal returns we saw in 2018 for a combination of reasons. One of the consequences of the sell-off in 2018 was to depress the amount investors were willing to pay for stocks. In 2018, the price-earnings ratio dropped to 15x forward earnings. The lower valuation level, combined with accommodative monetary policy from the Federal Reserve, resulted in the price-earnings ratio expanding to 18.5x. This rise in the price-earnings ratio produced 90% of the US equity return in 2019.


What can we expect in 2020?

Interest rates

The Federal Reserve has set its policy rate to 1.50-1.75%. According to the futures market (chart below) there is a:

  • 40% chance the Fed holds interest rates where they are;
  • 37% chance of a single rate cut; and
  • 18% chance of two or more.

We think the market has it right because we do not expect the Federal Reserve to lower interest rates in 2020 unless there is a significant downturn in the economy. Federal Reserve officials often talk of “policy space” – that is, having interest rates high enough to enact policy if needed. Unnecessarily lowering rates limits their ability to act in the event of an economic downturn. After all, if rates are close to zero, how much can the Fed stimulate the economy?


US Stocks

Lower returns usually follow years with big market rallies. Since 1970, the average price increase following a year when the S&P 500 rose more than 20% is a modest 13%. Unfortunately, the bull market of the latter part of the 1990s inflated the data. If we exclude these years, the average return the following year is only 7%.

The long run average price-earnings multiple is roughly 16.5x, putting current valuations slightly above historical averages. Without another expansion of valuation multiples, earnings and dividends will be responsible for driving stock returns in 2020.

Factors Abroad

Despite a reasonable forecast for 2020, we do have some concerns. What do we make of negative interest rates in Europe and Japan? Why would any investor buy a security knowing they are expected to lose money? Perhaps more importantly, if you borrow money, it should cost you something. Why would lenders overturn this basic principle of financial markets?

On the economic front our chief concern is China because it generates more than a third of global economic growth and has broad industry reach. For example, China is General Motors’ largest market. If China’s economy slows over the coming years as expected, consumer demand for vehicles will likely suffer. In addition, there are financial imbalances impacting the country that could result in measured economic growth coming in lower than current forecasts.


Despite negative indicators, we take heart in the solid economic fundamentals we see here in the US. Consumer spending, critical for our economic growth, remains strong. With the economy continuing to generate new jobs and limited concern about the financial health of US consumers, we see a path forward for continued economic expansion and further US equity gains. It’s not an exciting forecast, but we believe this “middle” position is more probable than the hyperbole we’re hearing from some pundits.

It’s Tax Season! Do you know what you need?

The IRS will start processing returns January 27th although several key tax documents will be mailed to taxpayers after the 27th. To avoid refund delays, be sure to gather all year-end income documents before filing a 2019 return. Filing too early, before receiving a key document, often means a taxpayer must file an amended return to report additional income or claim a refund. It can take up to 16 weeks to get an amended return refund.

Tax season is stressful enough without having to track down tax documents or wonder when they’ll be available. Schwab’s 1099 dashboard helps eliminate some of the guesswork by providing an easy way for you to view availability dates for your Schwab 1099 tax forms. Clients can access the dashboard online at or via the Schwab Mobile app. In the Schwab Mobile app, go to More > Client Service > 1099 Tax Forms, and it will list accounts that will issue a 1099 for 2019 and the expected release date.

Important documents needed for your tax return:

  • Forms W-2 for wages, salaries and tips
  • All Forms 1099 for interest, dividends, retirement, miscellaneous income
    – Your CPA may also request brokerage statements showing investment transactions for stocks, bonds, etc. Information in your year-end statement will be covered by Forms 1099-DIV and/or 1099-INT.
  • Social Security, state or local refunds, gambling winnings, etc.
  • Schedules K-1 from partnerships, S corporations, estates and trusts
  • Statements supporting educational expenses, deductions or distributions, including any Forms 1098-T, 1098-E, or 1099-Q
  • All Forms 1095-A, 1095-B, and/or 1095-C related to health care coverage or the Premium Tax Credit
  • Statements supporting deductions for mortgage interest, taxes, and charitable contributions (including any Form 1098-C)
  • Copies of closing statements regarding the sale or purchase of real property
  • Legal papers for adoption, divorce, or separation involving custody of your dependent children

Documents not needed for the return:

  • 401(k) statements
  • IRA statements
  • Statements for any other tax qualified account
  • Life Insurance summaries
  • Proof of gifts under the gifting limit ($15,000 per individual)

Be aware that some of the important tax documents will be mailed at different times.

Timeline of IRS deadlines:

January 31, 2020

  • Employers must mail Form W-2
  • Businesses must provide Form 1099 for non-employee compensation, bank interest, dividends, and distributions from a retirement plan

February 18, 2020
Financial institutions must provide:

  • 1099-B relating to sales of stock, bonds, or mutual funds through a brokerage account
  • 1099-S: real estate transactions
  • 1099-MISC: if the sender is reporting payments in boxes 8 or 14

February 28, 2020

  • Deadline for businesses to mail Forms 1099 and 1096 to the IRS

April 15, 2020

  • Last day to contribute to a traditional IRA, Roth IRA, Health Savings Account, SEP-IRA, or solo 401(k) for the 2019 tax year. You have until October 15 to fund a SEP-IRA or solo 401(k) if you get an extension.
  • Deadline to file Form 1040 for individual tax returns
  • Deadline to request an automatic filing extension using Form 4868
    – Provides an extra six months to file your return
    – If you will receive a Schedule K-1 from a 1 from partnership, S corporation, estate, or trust you may need to plan for an extension
  • Payment of taxes is due even if you file an extension

As always, we remind you to refer any questions to your tax professional.

Shannon Dermody

Shannon DermodyTEST

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