Kevin: Hello, John Finley and Kevin Coyle here, it’s February 10, 2020; John, a quick update on the year behind us?
John: 2019, good year in US stocks, up 31% on the S&P 500. Most of that, of course, being driven by large cap growth companies. That of course is coming off a pretty bad 4th quarter in 2018 where stocks were down almost 20%. If you take that into consideration, it’s still a good year but valuations are getting up there and I’m not sure if corporate profits are able to sustain that kind of level for some of these stocks.
Kevin: If you look at most of the prognosticators this time of year when all their forecasts come out and they look at where interest rates are, where earnings are, where price multiples are, and they give you their expectations of the 10-year forecast. Those are looking to be lower than what you would expect compared to the last 10 years.
John: Yes, that is largely because of evaluations and the feds are on hold so interest rates will stay low for awhile but you’re right. When you’re starting at those kinds of large multiples, the expected returns are going to be lower.
Kevin: We’ll chat a little bit about that at the end, but let’s go into some of the ranges of expectations in terms of economic activity the year ahead and things like that.
John: Our view is pretty much in line with the consensus, and we're looking at around 2% or so real GDP growth in the US. Feds on hold as I said, inflation is still tame, there is, of course, always downside chance that the economy may take a turn, but we think the recession probabilities are low. Likewise, I think there's an even smaller chance the economy could grow at a much faster clip. I don't see that happening, but you never know.
Kevin: When you look at the expectations and they're lower than if you look over the long-term history of expected returns from stocks, and that's been from the big run we've had over the last 10 years. It's not just going to be a single digit straight line. You would expect some volatility over the next 10 years, which is normal when you have peaks, troughs, economic growth, etc. So, when you're making your marginal decision making, in terms of your overall portfolio structure, just some final thoughts.
John: Stocks are the place to be for the growth component of everyone's portfolio, and you're right, there's going to be volatility on a short-term basis. But on a long-term basis, you want to keep that allocation steady. There may be some opportunity here with growth stocks being valued the way they are, we may see that long awaited rotation out of growth in the value because there's many companies that are not trading at high multiples. So that could be an opportunity for some people to shift out of the growth component into the value side.
Kevin: With that being said, we have maybe a month or so left with this winter, we're looking forward to spring. Until next time. Enjoy.
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Posted on Fri, February 14, 2020
by Kim Frank filed under