As we look back on 2019, the headlines were terrible. “Trade Wars”, “Impeachment”, “Iran”, “Brexit” and “China” dominated the news cycle.

Add to this the cacophony of pundits talking about “recession” and it is no wonder that investors pulled $135.5 billion out of equity mutual funds and ETFs during the year. It has been the largest withdrawal from stocks since 1992. Yet, the US stock market performed well in 2019.

Who was buying? Corporations continued to buy their own shares and non-US investors flocked to the safer shores of the US.

Financial lessons learned in 2019

Some lessons were learned.

First, when it comes to the stock market, the conventional wisdom is often wrong.

Second, the headlines are not good barometers of the right time to invest. If you have a long investment horizon, trying to time the market or “waiting until the coast is clear” can cause investors to miss good years.

Steady, continuous investing through the ups and downs and through the uncertainties has shown to be the best long-term strategy.

The market is difficult to predict because there are so many factors that go into stock prices.

Corporate earnings aren’t the only input

For instance, a reasonable criticism of the market is that corporate profits have been down for three consecutive quarters. Lower earnings should mean lower stock prices. However, earnings, while critical are not the only input.

Interest rate levels matter

The level of interest rates is also important.

In 2019, declining rates have offset profit concerns allowing stocks to rise. In addition to the many factors, markets reflect the future. Stock prices anticipate future events. Some say 6 months in advance.

Perhaps the stock rally over the past week is telling us that the recent streak of lower corporate profits is about to end. The commentators will fill in the blanks with reasons after the market moves.

So what’s in store for next year?

The pundits will once again throw out their “Up 10% Forecast” which almost never happens.

I won’t attempt to make any predictions but I will make some observations.

Parts of the market have underperformed for some time

There are parts of the market that have underperformed for some time, namely financials, small-caps, and emerging markets.

Recently we have seen these sectors pick up. They are under-owned by Wall Street. Seems like this could be a set up for these areas to do well.

Financials, energy, and retail are unloved

Along with financials, energy and retail are very unloved.

We know the reasons. Fossil fuels are destined to go away. Amazon will destroy all retail. As we noted earlier, given the conventional wisdom is often wrong, these corners of the market might be worth looking into.

What about the $135.5 billion that abandoned stocks?

Oh; let’s not forget about the $135.5 billion that abandoned stocks?

Will some or all of it come back?

As the Presidential Election moves into earnest, all sorts of fears will swirl in the press. I encourage investors to stick to their financial plans and asset allocations and stay on track.

I wish everyone a meaningful, quiet, peaceful, and fun season of holidays.

— Ian Green, Pendragon Capital Management

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Note: This blog article is intended for general informational purposes only. Nothing in it should be construed as, and may not be used in connection with, an offer to sell, or a solicitation of an offer to buy or hold, an interest in any security or investment product.