What Matters Most: Curi Capital’s Q4 2019 Market Commentary

By: Mark Paccione, CFA, CFP®, BFA™
3 Minute Read

“To be clear, it’s not that nothing matters anymore. It’s just that what you think should matter and what actually matters to the market are not the same things.”

J.C. Parets, CMT, Chief Market Strategist, All Star Charts

As the new year begins, let us make a resolution to focus on what matters to markets in 2020.

We can first start by agreeing that what doesn’t matter are politics and current events—despite traditional inclinations.

With the S&P 500 trading near all-time highs (up 31.4 percent in 2019), here is a list of recent events that the market shrugged off:

  • Impeachment of a sitting president for the 3rd time in U.S. history
  • Assassination of a top Iranian general and subsequent retaliatory missile strike against U.S. Armed Forces by Iran
  • Trade war between the two the biggest global economies
  • Drone strike against Saudi oil fields
  • Widespread protests and civil unrest in Hong Kong
  • Brexit

For those still not convinced that geopolitics don’t matter to markets or that this is just a recent phenomenon, here’s a list of historical events where the S&P 500 Index rebounded less than a year later:

  • Japan’s bombing of Pearl Harbor
  • Assassination of JFK
  • Resignation of Nixon
  • Election of Obama
  • Election of Trump

What does matter to the state of the market are major changes in fiscal policy by governments, company earnings, the overall health of the global economy, and most importantly, now and for the foreseeable future, the actions taken by the U.S. Federal Reserve. More specifically, the direction of the interest rate controlled by the Fed, the Fed funds rate, and the direction of the Fed’s balance sheet appear to have the greatest impact on U.S. stock markets.

Making Sense of What Matters  

To illustrate, the Fed raised rates in the fall of 2018, indicated future hikes were in store, and signaled that the shrinking of its balance sheet was on “auto-pilot.” The Fed was clearly tightening monetary policy at the end of 2018, and markets did not respond well as the S&P 500 Index was down 13.5 percent in the fourth quarter of 2018.

In early 2019, however, the Federal Reserve Chairman, Jerome Powell, walked back many of his comments, essentially stopped hiking rates abruptly at the beginning of the year, and the Fed is now cutting rates. The Fed’s monetary policy change from tightening to easing was a big contributor to the stock market’s phenomenal rise in 2019.

What’s Next?

Looking ahead, conditions for the market remain favorable, though not as favorable as 2019. While the Fed is on hold, it is not expected to cut rates further. In addition, the Fed’s balance sheet will continue to grow, albeit more slowly. Investors should set expectations for more average stock market returns in the single-digit range—and while current events don’t matter, over time, they will continue to cause short-term volatility that long-term investors would be wise to ignore.

Several likely events that would cause some short-term volatility in 2020 include:

  • The reigniting of trade tensions
  • A more progressive candidate winning the Democratic nomination for President
  • The current U.S. president tweeting something controversial

One action clients can take is to proactively raise any cash they need for spending over the next 12 to 18 months. Stocks have had a great run and are due for a period of consolidation. Bonds appear surprisingly resilient recently, making this an opportune time to trim stocks back to target and fund income and upcoming spending needs.

Finally, we are not market timers here at Curi Capital. We are long-term investors and take this approach on behalf of our clients. Now is the time to make sure you have a well-diversified portfolio—designed to meet your specific financial objectives and constructed to weather both good markets and bad. We don’t always know with certainty when the market will sell off, but we do know the market will decline from time to time.

If you are interested in constructing and managing a well-diversified portfolio tailored to your unique needs, please reach out to a member of the Curi Capital Wealth Management team at 984-202-2800.

Disclaimer: Curi Capital is a Registered Investment Adviser. Curi Capital is not a tax or legal advisor. All decisions regarding the tax and legal implications of your investments should be made in consultation with your independent tax and/or legal advisor.

Mark Paccione, CFA, CFP®, BFA™
Mark Paccione is Curi Wealth Management, LLC’s, Chief Investment Officer, based in Raleigh, NC.
News & Knowledge