To the Investors of International Research Securities:
This was the year of great reward that we all hope for. The US market defied many expectations of correction last year. (S&P +31.49%, DJIA +25.34%). A late 2018 drop was quickly wiped away through February. We found ourselves in a trade war cycle that ultimately lead to the Fed deciding to loosen the monetary policy allowing easier access to cash for businesses. Other more global indices were up around 20 points in the face of skepticism of the sluggish movement of the European economy and the deceleration of the Chinese markets growth(MSCI +23.92%). The result was that those who handled their risk tolerance through diversification were well compensated in 2019.
How much longer can this market continue? There were many reasons that markets could have changed course last year, but ultimately didn’t. This goes back to the roots of our investment philosophy. We expect volatility and are prepared for it. We need to keep our most valuable asset working for us, our long term perspective.
There are always reasons why a market could drop, but there are also reasons why the longest bull market in history can continue. According to Money Magazine, bull markets don’t die of old age, but because of one of the following three things: recessions, rapidly rising interest rates, or declining corporate profits. Relative to recessions, debt levels relative to income are at their lowest in 40 years which means the American consumer is poised to continue spending. In regard to interest rates, the Fed seems very conscious of holding interest rates steady, in fact we saw them lowered last year in the face of a rapidly growing market. They have some room to go with rates if they need to but I believe we saw them lower the rate as an adjustment to try and get ahead of something instead of trying to be reactionary. For those of you who don’t sit around thinking about the stock market all day everyday (which you shouldn’t, but if you do then maybe you should come take a desk at the firm) The 2008 credit recession technically started in January 2008. Therefore it took us 10 months to detect and price in an economy contraction. If we study other contractions, we will find that 10 months is on the low side and we typically price them in 10-16 months after a technical contraction. The Fed has deployed new techniques to detect and smooth out these issues and enabled them to soften the blow to the market. This could be a reason why the Fed lowered the rate this year and is holding near lows. This would keep its target in line with a projected 15 years of low rates if historical cycles continue. Last, we are still seeing corporate profits growing at healthy rates in support of capital gains. Even though history is not an indicator of future performance, corporate profits usually either level off or drop before a stock market correction.
The newspapers will fly a flag in your face telling you how old your bull run is but they don’t tell you that it has been one of the least lucrative. If you measure financial prosperity in 20 year segments you would find the second worst of all time was 1997-2017. Again, we cannot perfectly predict the future, We may see a temporary months long downturn, but we know that there is some room to run if we remain long perspective.
Welcome to a new decade. We expect to see 1 Billion more people added to the middle class before the next decade starts. 90% of those will be in Asia and India. The 10 year outlook is good and we see companies ready to grow and win that added business and even with a trade war brewing, the Global lines are blurring. We need to focus on finding the best companies to invest in for the right reasons and every year it means less and less where those companies are domiciled.
Our firm is committed to holding strong on ideals and philosophies that this company has maintained for over three decades. We are always looking for ways to keep fees minimal, mitigate risk with diversification and active management, and help you to achieve your financial objectives. We treat every investment choice as if it were our own to make. You honor us with your trust, and we view every referral as an extension of that trust. We enjoy getting to meet or talk with you because it means that we are getting to help you accomplish your goals. Do not hesitate to use us to your full advantage.
I hope you personally take every advantage to grow in self and financial wealth this decade and thank you for your continued business.
Happy New Year!
Michael Holland, President International Research Securities