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1st Quarter Market Commentary

Market Wisdom You Can Use in 2020

As we enter 2020, investor opinion appears quite divided. While the experts talk about 2020 bringing “modest, but positive, stock market returns,”1 investors worry that the Bull is aging, market values are too high and that the next crash or recession is just around the corner. So, you may ask, “Are equity assets in for a tumble?”

Myths and Behavioral Finance

The fact is, we are surrounded by many myths that have a grain of truth, but are generally mis-leading. For example, many people believe that a long bull market is bound to end at any moment. However, the truth is, Bulls don’t die of old age. They are assassinated! In other words, age is not a factor. There is always something that causes rising markets to fall into recession. What is it? And will we see it coming? Maybe or maybe not.

Moreover, human nature has proven that our natural instincts are not conducive to market success. The whole field of behavioral finance has defined multiple tendencies of investors that are self-defeating. Economic theory strives to be rational about market strategies. However, humans are not well guided by rational behavior. Instead they [we] are often tripped up by our natural biases. Behavioral Finance has identified four areas where our human psychology causes us to act irrationally and trump investment success. They are 1) Self-deception, 2) Over-simplification, 3) Social influence, and 4) Emotion. We all have seen ourselves or others becoming anxious during market down turns, waiting until we “just can’t stand it” to sell out.

Rationally, that is the exact wrong move. Market history and economic theory says, “Buy low.” But, many investors do exactly the opposite and suffer the consequence of losing money. We lock in loses when we sell at the bottom and when we jump on a rising stock, generally pay way too much for the privilege.

It’s the Economy Stupid!

The fundamental driver of market values is the economy, specifically corporate earnings. However, there are times when the mass psychology of investors is out of sync with the economy. The chart1 above illustrates this disconnect.

Earnings Growth in green was strong and rising in 2018. Then in October the market total return in orange began to drop. By December it was in a freefall, and earnings only sagged a bit. Notice three dips beginning in April, 2019. The earnings continued to rise smoothly until the market total return caught up at year end.

Thus it appears market total return dips are psychology not reality sometimes. Notice how closely the market total returns mirror the movement of multiples in grey. Investors watch multiples closely. But, you can see that multiples are not indicative of the health of the economy. Corporate earnings are the true driver.

NEWS: The Short-Term Wild Card

Day to day market values seem to be swayed by the news. “China Trade Deal Closer.” “Trump Raises China Tariffs.” Good news, bad news and the market reacts. But long-term financial markets weather good news and bad.

So, how can you use the short-term effect of news? News fear and euphoria are buying and selling opportunities! If markets drop because of a bad news headline, while corporate earnings are rising, employment remains strong and retail sales are up, it is time to put cash to work. If markets are surging breaking new highs, it may be time to take money off the table and collect some profits.

VALUATION: The Ultimate Economic Force

Ultimately, market valuation is the key to growth potential. But, valuation is actually a moving target. Most people see market indexes breaking all-time highs as a sign of overpriced equities. “Not so fast!” The price of stocks may be high or low only in relation to earnings. If earnings were currently weak, record index numbers may indicate expensive stocks. However, if earnings are strong and expected to continue or increase, the current year-end 2019 record indexes do not signal expensive stocks. 

One bullish analyst, Brian Wesbury, goes so far as to say, “Stocks remain cheap at the current level of profits and are even more so given expected earnings growth.”2  While some may disagree, last year Wesbury predicted a strong 2019 with the S&P 500 hitting 3100. He even raised his forecast mid-year to 3250. As it turned out, the S&P 500 closed at 3230.78 on December 31st!   

So, market wisdom you can use is this: 

  • Follow the economy in terms of corporate earnings. 
  • Resist the temptation to be influenced by the news of the day.
  • Recognize your own emotion and biases may lead you astray.
  • Get a good advisor who can help you earn your true potential with the assets you have.




David L. Harris, PhD, ChFC, CFP®
Wealth Advisor 

A Registered Investment Adivsor

(310) 318-3700

Harris & Associates is a Registered Investment Adviser. This commentary is solely for informational purposes. Advisory services are only offered to clients or prospective clients where Harris & Associates and its representatives are properly licensed or exempt from licensure. Past performance is no guarantee of future returns. Investing involves risk and possible loss of principal capital. No advice may be rendered by Harris & Associates unless a client service agreement is in place.

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1 (2019, December 30). JP Morgan Asset Management Weekly Market Recap Chart & "Thought of the Week." 

2 Wesbury, Brian S. (Chief Economist); Stein, Robert (CFA-Deputy Chief Economist). (2019, December 30). First Trust Monday Morning Outlook - "The Expansion Continues."