Talbot Financial – 4Q 2019 Review

Written by Jim Pirak on 24 January 2020. Posted in Blog

In 2019, the U.S. equity markets benefited from a continued robust U.S. economy, the Federal Reserve lowering interest rates, and concerns over tariff wars dissipating. Talbot Financial’s benchmark for performance comparative purposes, the S&P 500 Total Return Index (“Index”) returned 9.1% in the fourth quarter of 2019, and 31.5% for the full year.

Performance for the Index in 2019 was driven by strong returns in the following industry sectors: Information Technology (up 50.3%), Communication Services (up 32.7%) and Financials (up 32.1%). Compared to the Index, we continue to target an overweight allocation in clients’ investment portfolios in the Information Technology and Financial sectors. Primarily, because we like the strong secular growth characteristics of technology companies and the attractive valuations of banks.

Looking ahead to 2020, we forecast further strength in the U.S. economy and solid growth in corporate earnings. Therefore, our view is the risk of a near-term economic recession remains limited. The underpinnings of a continued healthy U.S. economy are numerous and include:

Accommodative Monetary Policy

The U.S. Federal Reserve lowered short-term interest rates three times in 2019. Current policy remains supportive of an economic expansion.

Full Employment

U.S. unemployment stands at 3.5%, marking a 50-year low. A broader definition of the U.S. unemployment rate (known as U-6,) which takes discouraged and part-time workers into account, hit 6.7% last year, representing an all-time low. The U.S. economy has added over two million jobs for nine consecutive years.

Low Inflation

The Consumer Price Index (CPI) increased 2.1% over the previous 12-months. Wage inflation, an important indicator of future inflation, registered 2.9% in the latest period. A reading of this level suggests the work force is seeing wage increases, but not at a rate that drives overall inflation higher.

Strong Consumers

11-years of U.S. Gross Domestic Product (GDP) increases, combined with nine consecutive years of job growth, have increased household net worth and improved consumer balance sheets. This is important as the consumer/service economy now represents almost 70% of U.S. GDP.

In summary, all of the above should translate into approximately 2% GDP growth in 2020, roughly in line with the 2.3% growth rate over the past decade.

As previously stated, our perspective is the risk of an economic recession remains low. We continue to monitor seven key factors, which historically precede a recession. Those factors include the yield curve, employment, inflation, credit risk, housing, manufacturing, and earnings quality. Prior to the last six recessions, at least half of these indicators flashed a “red light.” During 2019, two of the indicators flashed a “yellow light.” The yield curve inverted briefly over the summer, but Federal Reserve easing of short-term interest rates quickly corrected this anomaly. The ISM manufacturing index is currently flashing a yellow light, but the easing of U.S. – China tariff restrictions should dissipate this risk. As it stands today, six of the indicators are flashing a green light, one is flashing a yellow light, and none are flashing a red light. If history is a guide, a recession is not imminent, and the current risk remains low.

Against the backdrop of a healthy domestic economy and limited recession risk, we anticipate the type of companies you own in your Talbot Financial portfolio, predominately large cap multi-national companies, to grow earnings per share (EPS) in the mid-single digit range. We believe this growth will be driven by a combination of revenue growth and significant share repurchases.

Lastly, we want to make you aware of a new feature Schwab recently added to your online account that illustrates your portfolio’s investment income. After logging in to your Schwab account, the new feature is located under the accounts summary tab (“Investment Income”). The tab allows you to view your portfolios dividend and interest income for the previous year and projected year ahead.

As always, we look forward to reviewing your portfolio with you. Please do not hesitate to call with any questions.

Talbot Financial, LLC