The Rear View & Road Ahead: 2019 Edition

January 02, 2020

This newsletter is our take on the themes we think are driving markets and what could be coming around the bend. We don’t try to predict the future but instead aim to understand the landscape we’re traveling through and design a strategic plan accordingly.

There are three sections to enjoy:

  1. The Rear View: Our summary of the events that shaped economies, markets, and geopolitics
  2. Talking Shop: The numbers and data that characterized investment markets
  3. The Road Ahead: A longer essay detailing how we think about wealth management

1) The Rear View

Each quarter, we review what we liked, what we disliked, and what we are watching across economies and markets. Last year was a rapid turnaround from 2018 so without further ado let’s dive in!

Financial Economics

What we liked: The probability of a recession fell in the last quarter to levels last seen in early 2019. While not perfect forecasts, an easing of interest rate-based recession indicators can calm markets and investors.

What we disliked: Manufacturing activity remains at subdued levels suggesting a contraction of output, reversing course from the manufacturing expansion that began in early 2016 and continued through mid-2019.

What we are watching: Annual wage growth outpaced inflation by at least 1% each month throughout 2019 [1] but fell short of the 1.5 to 2% range that is suggested for workers to benefit from economic growth. When will wages perk up and how will that affect corporate profit margins?

Investment Markets

What we liked: It was hard not to generate returns in 2019 as major indices around the globe earned double digit returns. The market expansion continued to be led by U.S. stocks, but global stock markets and bond markets delivered significant positive returns as well.

What we disliked: U.S. stock valuations touched levels last seen in October 2018 when the S&P 500 protracted by 13.5% to end the year. For the bull market to continue it needs support from earnings growth since an ever-higher price multiple of earnings may be difficult.

What we are watching: Investors have piled into riskier asset classes to generate returns as global interest rates remain at depressed levels. When this happens, the return for taking risk compresses. What will play out in the decade to come? A diversified portfolio of risk exposures is a good place to start.


What we liked: Global trade frictions eased in December as the U.S. and China agreed to sign the first phase of a trade deal and the NAFTA replacement USMCA passed in the House. Continued easing of hostilities should support further investment returns.

What we disliked: Tensions between the U.S. and Iran escalated throughout 2019 as Iran was accused of attacking Saudi oil facilities and embassies while the U.S. bombed Iran-backed military bases. In a volatile region, further escalation could have broader implications.

What we are watching: To start the decade central banks around the globe coordinated with each other to guide the world economy out of the deepest recession since the Great Depression. Today, our geopolitics is more adversarial and protectionist. Will these tactics lead to better outcomes or fracture the global order?

2) Talking Shop

All data supplied by YCharts Inc. unless otherwise noted

91% of the companies in the S&P 500 had positive returns in 2019, led by a 148% return for AMD (Advanced Micro Devices).


Every sector in the S&P 500 had double digit returns with Technology leading the way and Energy ranking last

The 2019 market rally was good to all regions and asset classes


ETF investors liked bond funds, cost-effective stock funds, and low-volatility products





3) The Road Ahead

Davey Quinn, CEO

Investment markets in 2019 underscored the broader investment landscape of the last decade. Stocks ascended to new highs led by U.S. tech giants and patient investors across all asset classes experienced healthy returns. It will be difficult to top 2019’s investment performance in the coming years considering a balanced stock/bond investment returned 20.1% last year - its best calendar-year performance since 1997[3]. Even more, the same balanced investment generated annual returns of 8.7% from 2010 to 2019, the best 10 calendar years of performance since 1995 to 2004. Given these stunning returns, I thought it was an ideal time to review the framework we apply when selecting investments that we hope can outperform in the future.

Our Investment Framework

I like to think about markets and regions using three “E’s” – economics, expectations, and emotions. These three considerations help us understand how investments behaved and where they may be going. Much like markets themselves, this framework is equal parts scientific and behavioral. For instance, good investment analysis should start with a fundamental understanding of the economic forces that drive returns – interest rates, growth rates, valuation multiples – but non-scientific forces also play a factor – fear, risk tolerance, expectation of loss. It’s impossible to fully comprehend the mood of the market, though many try, but this framework provides us with realistic assumptions and guidance as we move along the journey.

So how do we bring this framework to life? First, we gather the economic data that underpins markets and investments we are interested in. This starts at a high-level (markets) and can zoom in on more details (stock-specific). The economic questions to answer are three-fold:

  1. What are reasonable, long-term returns?
  2. What economic forces drive these returns?
  3. How have those forces behaved more recently?

"Much like markets themselves, [our investment] framework is equal parts scientific and behavioral."

Putting It Together

Let’s take the U.S. stock market as an example. From 1926 to 2018, the S&P 500 delivered 10.0% annual compound growth[4]. However, as we know, that wasn’t a smooth ride. The 12 months preceding June 1932 resulted in losses of 67.6% and the 12 months preceding June 1933 resulted in gains of 163%! More recently, U.S. stocks produced 9.3% annual compound returns since 1990 with the worst 12 months resulting in 43.3% losses and the best 12 months resulting in 53.6% gains. But what is driving this remarkable growth?

Using a fancy bit of mathematics, stock market returns can be decomposed into three components: dividends, earnings growth, and price-to-earnings growth. This makes sense, as an investor you can receive dividends and profits from the company and over time other investors may want to pay more for those earnings than they have in the past. Earnings growth can be expanded further into profit margin growth and sales growth – companies can either sell more or sell more efficiently.

The S&P 500 earnings growth rate was 10.4% as of June 2019, which is just 84% of the median growth rate (12.4%) since 1990. The price-to-earnings ratio, on the other hand, is closer to all-time highs – it currently sits at 24.1 as of December 2019, 13% higher than the median value (21.3) since 1990. This is a good segue into expectations and emotions – what is required to support continued growth?


Economic data is a backward-looking measure and investing is a forward-looking endeavor. Expectations of what the future may hold and emotions about that future present themselves through prices – the value that investors are willing to pay for securities. The price you pay for a security encompasses the underlying economics of that investment as well as every investor’s view of that security. So, if your expectations of an investment are positive that doesn’t necessarily mean that those expectations will yield better returns – your expectations should be better than the rest of the market’s view to result in outperformance. This is why predicting markets and outguessing other investors is a difficult task.

However, we can try to identify the current expectations and emotions wrapped up in securities to understand what could materialize. To do this, we review data, such as investor sentiment and relative prices, and this helps unpack which markets have positive forces behind them and those that may be facing more doubt. Right now, the U.S. stock market has fairly strong expectations propelling it forward, as evidenced by the higher than average price-to-earnings ratio. Further, the emotions investors display towards the market are also rosy – the percent of investors who are bullish outweigh those that are bullish by 20.4%, which is 12.9% more than the historical average spread of 7.5%. Given these rosy expectations, investors will need to see more positive evidence for growth to continue supporting the higher price-to-earnings ratios and not be struck by an onset of fear. This is a tall order for 2020 and beyond, so we expect that 2019 is fully in the rear view and the future may be a bit more bumpy.

"Combining data from economics, expectations, and emotions [can] help select investments and markets that may outperform."


The most important aspect of our framework is its consistency - we don't change our understanding of markets or investments based on the latest run up or plunge in prices. Instead, we focus on an evidence-based approach - combining data from economics, expectations, and emotions to help select investments and markets that may outperform. However, this analysis isn’t a tool to bet on markets or time when events may occur. We use it as a guide, like checking the weather before a trip, that we hope is directionally accurate but shouldn’t be trusted as perfect truth. Going forward, each quarter we will produce a report card detailing how each investment market fares along these three criteria.

If you have any questions about how our investment framework comes to life, or any other question, please reach out at (202) 301-5050.

Investment advisory services provided through Wealthcare Advisory Partners LLC doing business as Pine Harbor Wealth. Wealthcare Advisory Partners LLC is a registered investment advisor with the U.S. Securities and Exchange Commission.

Past performance is not a guide to future returns.