For the third consecutive year, the stock market posted a double-digit positive return. The S&P…
One year ago, the market was convinced that our economy was headed for a recession and we began 2019 on the heels of one of the worst quarterly market returns in more than a decade. This could not have been further from the truth. Once the market figured out that a recession was not happening, it ripped higher and never looked back. We finished the year with a gain of 28.9% in the S&P 500 which was capped off with the strength of an 8.5% return in the final quarter. Both the Dow and the NASDAQ followed suit with quarterly gains of 6.0% and 12.2% respectively, which led to an annual gain of 22.3% for the Dow and 35.2% for the NASDAQ.
That’s the good news. The bad news is that we once again find ourselves in a market that is a little top-heavy in terms of that Price-to-Earnings Ratio – or P/E Ratio. As we have said several times, the historical average P/E for the market is about 16.0x. We now stand at about 18.2x. Interest rates do remain at very low levels which means that an elevated P/E is appropriate. So, can we go even higher in 2020? It once again hinges on the growth that we are expecting to see. That P/E of 18.2x is forward-looking and dependent on expected growth of about 10%. These are pretty lofty expectations but with the momentum that we currently have and phase one of the China deal almost in the books, it really is not out of the question.
Finally, there is one more hurdle the market needs to cross in 2020 – well, maybe count it as two – the election. The market will have to digest both the primary election and the general election in November. Both elections could provide a catalyst to the market, but the weeks leading up to the actual event could leave the market with some uncertainty that often leads to lower returns. There is no question that a capitalist is what the market wants. If we get through the primary election with a Democratic candidate that promotes capitalism, the market should breathe a sigh of relief and the focus would return to the economy and company earnings. Of course, with the general election to follow, we could likely see another battle with uncertainty as we approach November.
Hopefully, the volatility in 2020 will remain in check as we climb over these hurdles. If it does and the growth continues, we could be in for another good year of returns.
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