Why Shares Are Unlikely To Repeat 2019’s Performance

By Glenn Dyer | More Articles by Glenn Dyer

Looking for guidance about where the market will go in 2020?

Will it rise, will it fall, will it mark time – judging by the performance since last July, the latter seems a good option, at least for the first quarter.

Major markets in the US and Australia, for instance, were up by 18%-28% or more in 2019 – which was a big rebound from the steep losses at the backend of 2018.

The ASX 200 index closed the year and decade down 1.78% on the final day – December 31 – at 6,684.1 points, while the All Ordinaries lost 1.72% to end at 6,802.4 points.

The ASX200 finished 2019 up 1,037.7 points – an 18.38% gain – for its best year since its 30.9% climb in 2009 in the first rebound from the depths of the GFC.

For the month of December, the ASX200 lost 2.36% (or 161.8 points), in just its third losing month for the year.

It was flat for the quarter, with a 4.2 point loss.

Global equities to their best year since 2009, up 24% for the year and 88% for the decade, according to MSCI’s all-country world index of stock performance in 49 countries

The split nature of the year was underlined by the fact that at the end of the June half-year (June 28), the ASX 200 was up 17.2% which means the gain over the final six months of the year was tiny – just on 1.2 points.

But it went on to set a new high in late July – but then fell away before recovering to hit a new high of 6,893.7 in December. Since then the ASXX 200 has shed 209 points or 3%.

In other words, despite the highs the market went sideways from August as investors realised that the Reserve Bank’s rate cuts (three in total) were aimed at helping an economy, especially the retailing and property sectors.

Weak wage growth, the failure of the Morrison government to face up to the problems of weakening household incomes and spending (a rising tax take) and the failure of the government’s tax refunds to boost consumption in the final month of the year, left the ASX adrift.

Healthcare – boosted by a lower Australian dollar’s impact on giants like CSL (up 49% for the year) and Cochlear (up 29.5% for the year) – and a tech sector boasting the WAAAX stocks of WiseTech (up 38%), Afterpay (up 136%), Appen (up 75%), Altium (up 60%) and Xero (up 90.4%) were the stars.

After staying its hand for nearly three years, the Reserve Bank cut the cash rate to a series of new all-time low three times in five months from June in response to gloomy economic data – especially retail sales which showed no real growth over the first 10 months of 2019.

Wages growth, consumption and inflation eased or fell and annual economic growth slowed to a 10-year low.

Intent on delivering a budget surplus, the Morrison government failed to respond by expanding spending or investment allowances to business (for example).

The slicing of the RBA cash rate saw bank lending rates (and deposit rates) trimmed and on top of the continuing fall out from the Hayne royal commission and then the Westpac money laundering scandal. That in turn undermined bank shares which lost ground over the year relative to the wider market.

The CBA saw a 10.3% annual gain – the best among the big financials, NAB shares rose 2.3% and ANZ shares were up a tiny 0.7%. Understandably Westpac shares fell 3.2% over the year – thanks to an 18.4% slump in the final three months of the year.

ANZ shares also lost ground in the final quarter with a loss of 13.5%.

The financials sector of the ASX 200 only managed a rise of 8.4% (against the 18% rise overall), so that underperformance held back the wider market’s gains for the year.

Financials remain the largest single segment of the Australian market, so their performance in 2020 will be crucial to overall gains or losses.

So to 2020 – well so long as the central banks, led by the US Federal Reserve maintain their current soft to easing monetary policy stances, then markets have the potential to move higher – but by upwards of 20% for Australia?

That’s hard to see and anyone punting on Wall Street repeating its 28% surge (the S&P 500) is fooling themselves – but that’s not to say markets won’t rise.

Looking ahead, “by any objective measure US large-cap stocks start 2020 on perilous footing,” Datatrek’s Nicholas Colas wrote in a note quoted by Marketwatch.com.

“Valuations are rich. Corporate debt levels are at record highs,” he wrote. “We have not seen any earnings growth in 4 quarters.”

“Wall Street estimates for Q1 and Q2 2020 are way too high. And Q4 2019’s rally of 8% on the S&P is purely based off the expectation that the US/global economy can turn more like a speedboat than a battleship.”

But take a look at this recent report from the New York Times (https://www.nytimes.com/2019/12/23/business/retirement/index-fund-investing.html) for guidance on the accuracy of most market forecasts from so-called strategists:

“In fact, many Wall Street strategists are flagrantly inaccurate. They are about as reliable as a weather forecaster who always calls for balmy sunshine in a city where it rains or snows a lot.

It is true that they are right about the market’s direction more often than they are wrong. But that’s only because most of them say the market will rise in the next year, which happens about 70 percent of the time,“ the NYT story reported and cited some interesting research.

The paper had Paul Hickey, a co-founder of Bespoke Investment Group, crunched some numbers and the result was that market forecasters are not very impressive

“For every calendar year since 2000, Mr. Hickey compared the annual Wall Street consensus forecast in late December with the actual level of the S&P 500 one year later. He found that, on average:

“The median forecast was that stocks would rise every year for the last 20 years, but they fell in six years. The consensus was wrong about the basic direction of the market 30 percent of the time.

“Mr. Hickey found that the forecasts were often off by staggering amounts, especially when an accurate forecast would have mattered most.

“In 2008, for example, when stocks fell 38.5 percent, the median forecast was typically cheery, calling for an 11.1 percent stock market rise.

“That Wall Street consensus forecast was wrong by 49.6 percentage points, and it had disastrous consequences for anyone who relied on it, the Times story reported.

“The median forecast was that the stock index would rise 9.8 percent in the next calendar year. The S&P 500 actually rose 5.5 percent.

“The gap between the median forecast and the market return was 4.31 percentage points, an error of almost 45 percent.

The paper however pointed out that “there is a more reliable and a simpler way to make investing decisions, one that doesn’t rely on putative forecasts. It is based instead on long-term historical data on the broad returns of the stock and the bond markets.”

“They show that stocks outperform bonds over extended periods, but that stocks are far more volatile than bonds. Holding both stocks and bonds makes sense because they tend to buffer one another,” the NYT pointed out.

This is the investment strategy of the likes of Vanguard founder, Jack Bogle and Warren Buffett and his Berkshire Hathaway empire.

Glenn Dyer

About Glenn Dyer

Glenn Dyer has been a finance journalist and TV producer for more than 40 years. He has worked at Maxwell Newton Publications, Queensland Newspapers, AAP, The Australian Financial Review, The Nine Network and Crikey.

View more articles by Glenn Dyer →