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It’s never hard for investors to find the negative. At the beginning of 2019, market analysts were pointing to any number of geo-political and economic events with the capacity to send markets into a tailspin. The US-China trade dispute was the headline act for the simple reason any ramifications would be political and economic on a global scale.
But the list also included the Korean peninsula (think “rocket man”), Brexit, the Middle East and Venezuela and their impact on the oil price, and a slowing Chinese economy. There was even analyst talk of the US economy going backwards, and perhaps sliding into recession in 2020.
Yet with the curtain falling on 2019, none of these events rattled investor confidence. This calendar year has seen Australia’s all-ordinaries index ahead 18.8 per cent, the US key market barometer, the S&P 500, up 25.5 per cent, and even in a Brexit-fixated Britain the Footsie 100 gained 6.9 per cent.
So, what’s the lesson for investors? First and foremost, market analysts and economists don’t always get it right, and, even when they do, it doesn’t mean markets respond accordingly. Analysts on the cusp of 2019 predicting bull markets were few and far between. But the geo-political fears they highlighted to paint their doomsday scenarios held no fears for investors. And history tells us they rarely do.
Since World War 11, there have been four major share-market crashes –1973-74, 1987, the dot-com bubble of 2000, and the 2008 GFC – and none was the product of a geo-political event. Further back, when Wall Street crashed in 1929, the world was relatively benign; Hitler was four years from power and Japan’s territorial ambitions were isolated to a divided and bankrupt China. It was largely economic events that saw markets struggle in the 1930s.
In the eight decades between 1930 and 2010 and using the US S&P 500 as the bellwether index for global share-market activity, the 1930s was one of only two decades over this period that saw equity market returns retreat. The other was 2000-09 where the GFC was the prime culprit.
Over this 80 years, geo-political events have rocked markets – not derailed them. The US market soon rallied after Pearl Harbor; indeed, the 1950s bull market started well before World War 11 ended. Korea, the Cold War, Vietnam, the Cuban missile crisis (1962), numerous Middle East conflicts, the fall of the Berlin Wall, even September 11, have had little sustained impact on markets. No, the four market crashes since World War 11 were largely unrelated to politics.
Today, as share-markets respond from one Trump tweet to the next, investors need to remind themselves how resilient markets are, and how its economics, not politics, that usually precedes a bears’ picnic. When former US President Bill Clinton famously said during the 1992 election campaign, “it’s the economy, stupid”, it seems investors worked this out long before.
So, what’s the outlook for 2020? Well, in a presidential election year, especially one that promises to be as bitter as this one, expect short-term market volatility. But for reasons discussed, it’s a sideshow – not the main game.
Economically, there’s ground for optimism; the prospect of improved US-China trade relationships, fading fears of a global recession, corporate results in the US and Europe meeting or exceeding (admittedly low) expectations and a range of economic data not showing any material worsening. As one analyst quipped, “Not so bad is the new good”.
In the US, manufacturing is struggling. But the housing market is robust, consumer spending, the mainstay of the economy, healthy on the back of a tighter labour market, and a strong services sector. Outside the US, resilient emerging markets growth is supporting the global economy. Even Europe is showing signs of investor confidence after several difficult years.
None of these positive trends is to say the share-markets in 2020 will experience a repeat performance of 2019; markets have priced in most of the good news and it would need something significant for the bullish sentiment to strengthen further.
Certainly, in Australia it’s hard to pinpoint such an event that would ignite buying like 2019. Similar to overseas, there are economic signs the sluggish growth of recent times might pick up with analysts predicting a stronger housing market, an ongoing export boom, and the impact of infrastructure spending. But consumers remain wary, symbolised by the fact they have banked, not spent, their tax cuts. Horrific bush fires and a crippling drought are further head winds to be navigated.
It was the famous US economist, John Kenneth Galbraith, who said “the only function of economic forecasting is to make astrology look respectable”. So, perhaps the best advice for investors for 2020 is simply this: ignore the experts’ predictions and focus on what you can get right – asset allocation, capital preservation and income protection.
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