February 14, 2020
Dear Clients and Friends,
I hope that you and your family are off to a happy and healthy start to 2020. On behalf of Houston Trust Company, we would like to
mention some of the events that unfolded in the financial markets in 2019 and share our January 2020 Market Commentaries.
What a difference a year makes! There was a complete reversal in the market environment last year compared to the last quarter of 2018. Rising interest rates triggered a 13.5% decline for the S&P 500 in the 4th quarter of 2018, resulting in a loss of 4.39% for the full year.
Conversely, the S&P 500 was up 9.07% in the 4th quarter of 2019 and returned a positive 31.49% for the entire calendar year. The 2019 annual return was the best since 2013.
As this performance reflects, market fundamentals improved significantly over the past year. We have received some clarity on the biggest market uncertainties: U.S.-China trade relations, the Federal Reserve pivoting from rate hikes to rate cuts, and the United Kingdom’s exit from the European Union. Within the U.S., corporate earnings have been better than expected and consumer confidence remains strong with record levels of employment and rising wages.
Based on expectations for better corporate earnings growth in 2020 and continued economic growth in the United States, our managers see support for stocks at current valuations.
After the strong market gains in 2019, corporate earnings growth should be the primary driver for stocks this year. Our managers believe the S&P 500 will increase by mid-single digit returns, consistent with profit gains, by the end of 2020. We look for mild inflation and still-low interest rates to support these valuations. At the same time, we are mindful of this extended business cycle. While we expect volatility to persist, we believe it is best to stay the course and remain properly invested in high quality diversified portfolios of high-grade bonds and large company equities.
2019 was also a successful year for Houston Trust Company as we celebrated our 25th anniversary. Financially, we surpassed $7.2 billion in fiduciary assets with record revenues
and strong growth in net income, and our capital reached an all-time high. We continued to grow our professional staff, relocated to a new office, and launched a modernized website,
all in the interest of better serving our clients.
We acknowledge that Houston Trust Company’s successes are due in large part to your continued confidence in us. We remain grateful for the opportunity to serve you and look
forward to continuing to work on your behalf for years to come.
David R. Lummis
Fayez Sarofim & Co.*
- The S&P 500 Index reached an all-time high in the fourth quarter as numerous developments supported the index’s best annual performance since 2013.
- Positive developments in the ongoing trade disputes, accommodative monetary policy, and a better than expected 3Q19 earnings season propelled markets to new heights.
- Corporate earnings have been better than expected which provided the markets relief while U.S. consumer confidence remained resilient with record low unemployment, rising wages, and a tight labor market.
- Global outlook has pivoted from pessimism to optimism as stable global growth, reduced uncertainty, and low interest rates create a favorable environment for businesses and consumers alike.
- Supportive central banks and reduced trade tensions contributed to a brighter outlook as the economic expansion enters its eleventh year.
- Markets will reward high quality companies that can expand market share, grow earnings, and provide a degree of defense against market volatility.
Luther King Capital Management*
- Investors spent a good portion of 2019 on recession watch as traditional warning signs, such as an inverted yield curve, slowing job gains, and contracting manufacturing activity pointed to an elevated risk of a recession but that was not the case as the S&P 500 Index returned 31.5% including dividends for 2019.
- We remain constructive on the outlook for domestic equities, despite their strong performance in 2019 and higher valuations, due to expectations of the lagged effect of easy monetary policy and marginally less trade policy uncertainty.
- Corporate earnings are expected to grow 5-7%in 2020 compared with around 2% for 2019, driven in part by a recovery of earnings within the energy sector.
- We continue to favor equities over fixed income, particularly with 46% of the companies in the S&P 500 Index trading with a dividend yield higher than the yield on the 10-Year U.S. Treasury Note of 1.92%.
- As November’s presidential election approaches, we could experience higher volatility in the markets, particularly if risk to the status quo is perceived to rise.
- The 2020 outlook is for the economy to continue to expand around 2% in real terms, aided by easy monetary policy as well as healthy consumption supported by continued strength in the labor market and real wage growth.
- We assign a low probability to the risk of a bear market occurring, absent a severe exogeneous shock to the economy.
Avalon Investment & Advisory*
- 2020 is the “Year of the Twos”: Inflation metrics and GDP should be in the low-to-mid 2% range, the U.S. 10-year yield should rise to the low 2% area, and U.S. unemployment may reach 2%.
- Stocks and risk assets should be supported by an improving global economy and a U.S. economy with a low risk of recession during 2020.
- Corporate earnings from the S&P 500 should grow 5% – 7% after a barely positive earnings growth period in 2019.
- For 2020, there are more positives for stocks than negatives with the expectation of more tempered returns and higher volatility. Stock valuations have certainly increased but remain attractive relative to bond yields.
- While the 2020 election is looming and sentiment is currently elevated, stocks enter 2020 with better news regarding U. S.-China trade tensions, economic growth, the Federal Reserve and corporate earnings.
- Bond returns are not likely to be as strong in 2020 as seen in 2019, but cash yields are currently expected to be relatively stable with the Federal Reserve on hold for the foreseeable future.
*All manager commentary published in 4th Quarter of 2019.