The US equity markets moved counter to the economy and the bond markets in the fourth of 2019. US equity markets had their best quarter in years as the S&P 500 advanced 9% and MACM’s dynamic growth portfolio (DG) and diversified equity (DE) advanced 11.9% and 12.9% respectively. The rally was rooted in several beliefs that grew deeper in the minds of investors as the quarter unfolded. The attacks on capitalism by liberal Democrats began to wane as Warren and Sanders retreated from their strong rhetoric of tearing apart corporate American superstars like Amazon, Facebook, Apple, Google, and Netflix. The trade picture also improved during the quarter as a deal was struck with the Chinese that would be incorporated in two phases. While trade has really not impacted the economy in America it has slowed the Asian economies dramatically and hurt global growth. These manufacturing areas of the world purchase significant amounts of American industrial equipment and this part of the US economy has been soft for several quarters. These areas of the economy came to life in the fourth quarter and we also saw Netflix and Amazon return to the top of the leaderboard.
The US economy continues to be led by a strong consumer who is executing on several different consumption themes. Millennial’s have been renting apartments at record Paces and as a result apartment construction has been a theme for many years. Millennial’s also prefer experiences over things and as a result companies who produce services have been seeing strong consumption for many years as well. This theme of experiences has benefited cruise lines, hotels, airlines, restaurants, and entertainment in general. The millennial’s also need their digital devices and seldom go anywhere without their phone tethered to their hip. These devices as well as all kinds of other digital devices are being consumed by consumers and corporate America as the world digitizes and relies upon digital devices for almost everything that they do in their lives and workplace. Corporate America continues to build out its infrastructure to allow consumers to do their computing on the cloud as opposed to having PCs and laptops loaded with software. This theme has benefited the web services divisions of Amazon, Dell, and Microsoft. All of these are significant holdings within MACM’s portfolios. The millennial’s are the largest part of the population and as a result we must keep our eyes tuned on what they are doing with their consumption. While they don’t earn as much as the baby boomers their mere size cannot be ignored.
Millennial’s are generally people age 25 to 45 with the largest part of the millennial’s population being people 35 to 45. A good portion of these individuals are now starting to opt for homeownership over apartment living. As a result housing seems to be a consumption theme that could reemerge after years of below average consumption. New home sales and existing home sales have been respectable but home prices nationwide have slowed from over 6% growth per year to under 2% per year currently.
Another plus for the US economy and the Trump administration was the finalization of the trade deal with Mexico and Canada (USMCA). This deal seems to bear fruit for all three countries and all should benefit from stronger growth in the years ahead.
The trade deal that the Trump administration engineered calmed the markets fears substantially in the fourth quarter. Over the last few years tariffs on US goods exported to China have risen from approximately 8% to over 20% currently. At the same time tariffs on Chinese goods being exported to America have risen from under 2% to approximately 20%. The first phase of the trade deal ends further tariffs by both sides and requires the Chinese to purchase substantial amounts of American agriculture. China has also made substantial confessions to new rules and penalties for not respecting American intellectual property. It is hard to say if America is much better off today as a result of the work Trump has done on trade but it would seem there has been some progress. The Chinese are feeling the pain of their unfair trade actions of the past years. Trump has called them out on their past actions and is holding them accountable for these breaches of fair trade and theft of intellectual property. As a result they are at the table negotiating with Trump.
The move in the equity markets in the fourth quarter was pretty amazing. This 12% gain in the fourth quarter came on top of 18% gains achieved in the first three quarters of 2019. MACM’s dynamic growth portfolio (DG) and diversified equity portfolio (DE) advanced 31.1% and 32.5% respectively in 2019. It was a great year for absolute return but only a modest year for alpha. The performance of Netflix and Amazon in 2019 was only average as these companies were attacked viciously by socialists and at the same time Amazon had its first quarterly miss in many years. This earnings miss was due to significant investment on next-day delivery which has proved to be of value but caused increased cost in Q3 as they introduced this service.
The outlook for the markets and the US economy remains bright. Economic conditions in the globe also seem positioned for improvement. After several quarters of below average consumption in the globe it would now seem that this ebb and flow global economy is set to flow a bit after several quarters of ebbing.
Pent-up demand has developed in America and the globe and will likely push the economy at a bit faster pace in 2020. As a result earnings growth will likely rebound to single digit levels from current flat levels. With inflation bottled up and real estate and bonds at all-time highs in valuations, stocks remain the best valued asset class. We have a world of highly valued assets that is supported by an economy that never seems to fall into recession and never seems to go fast enough to bust. This slow growth environment is ideal for stocks and remains our asset class of choice.
We remain optimistic.