My 2019 Market Review & 2020 Outlook
FEDERAL RESERVE BALANCE SHEET
Ever since the financial crisis of 2008, the Fed has injected Trillions of dollars into the economy which has resulted in the longest bull market in modern history. Interestingly, the Fed has increased its balance sheet from its low of $3.7T in Aug 2019 up past $4T currently even as they claim QE has ended. This has meant over 300% growth for the S&P 500 since 2009 and over 20% in 2019 alone. Although this has meant incredible growth this year, I do not believe this bodes well for the economy in the long run, as the government has artificially propped up markets with their huge balance sheet.
Source: St. Louis Fed. The Federal Reserve’s Balance Sheet since 2008 has seen incredible growth. But the recent increase leads investors to be bullish in the short term but cautious in the long run.
LOW INTEREST RATEs
In addition to this trend, we have seen extremely low interest rates which has resulted in cheap money in the form of lower interest loans. Additionally, this lowering of interest rates has pushed many investors with money in savings accounts into the equity and bond markets. Take my savings account in Marcus by Goldman Sacs account for example. Initially, I made a deposit in August this year with an interest rate of 2.0%, now the rate is yielding 1.70% - making it lower than the average 12 month inflation rate of 2.1%. This means my money in that savings account is slowly losing value and considering how the market is doing currently, I’m losing out on even more with that account. The only advantage to that account is the added liquidity over say a money market fund or CDs.
Source: St. Louis Fed. The Federal Funds Rate has been at all time historical lows and recently with quantitative easing has resulted in more liquidity and easier borrowing. The recent trend in lowering interest rates has hurt savings but has also propelled the economy forward.
easing TRADE TENSIONS
The ongoing trade war with China is moving in the right direction as US and China relations improve moving closer towards the 2020 elections. I believe this will continue to improve as Trump gears up for re-election. Trump is motivated to have the economy in a great position prior to the elections and China also wants reduced trade tensions as they grow their own economy. China’s finance ministry stated: “increase imports of products facing a relative domestic shortage, or foreign specialty goods for everyday consumption”. Calculations from Bloomberg showed the easing tariffs could affect $400B of foreign goods sold to China annually, out of a total import bill of $2T. Ultimately, both China and Trump don’t want trade tension in 2020.
IMPACT MOVING FORWARD
So, what has this all meant for investing in 2019? Equity investing has been extremely lucrative and those who have been invested during this time have profited handsomely. Investors have also been smart with leverage and businesses are taking advantage of the low interest rate environment after the 2008 crash. Major market indicators don’t point to a significant “bubble” ready to burst but the combination of the Fed’s monetary policy plus the recent tax cuts and this year’s corporate earnings struggle lead me to believe the market is probably overvalued.
That all being said, as a young millennial investor, my strategy remains the same - invest long term and stay invested. I believe the recent additions to the Fed’s balance sheet and lowering of interest rates have prolonged the bull market run but may shift with the 2020 elections. Personally, to further hedge my long term bets on the economy, I have recently been looking into sources of passive income to diversify my sources of income in preparation for market turmoil into 2020 and beyond.
Let me know what you think. Do you think I’m completely wrong and don’t know what I’m talking about? Let me know. What are your market predictions for 2020? Let me know. What should I write about next? Let me know.