Quarterly Letter

”A rigid mind is very sure but often wrong. A flexible mind is generally unsure, but often right.”

- Vanda Scaravelli

It is probably hard to remember after a week or so of coronavirus fears, but during Q4 2019, “risk” assets once again outperformed “haven” assets.1 This was after two quarters of “haven” asset outperformance. During the fourth quarter, equities led the way, up 9.0%, and commodities were a close second, up 7.7%. In the “haven” category, gold was up a modest 2.9%, while long-dated US Treasury bonds were down 4.7%. For the full year, all four primary asset classes were positive, and meaningfully so: equities were up 31.2%, gold increased 17.9%, commodities improved 15.6%, and long-dated US Treasury bonds gained 14.1%.2

For additional benchmarking purposes, we look at a global equity index and a broader bond index to get the most comprehensive perspective. The 60/40 mix is the basic asset allocation benchmark, and with good reason, it is a very hard standard to beat over a full market cycle.3 For 2019, the MSCI All Country World Index4 was up 26.6%. The iShares Core US Aggregate Bond Index5 was up 8.5% for the same period. A typical 60/40 mix was therefore up 19.4%.6

Where to from here?

Some observers believe 2019’s significant price gains portend a pause in “the everything” bull market; “too far too fast,” as the saying goes. Our favorite barometers of market sentiment actually suggest a continuation of the current bull market in equities, albeit at a slower pace, and notwithstanding a major global coronavirus contagion. HCWE’s credit spreads & gold framework and Lowry Research Corporation’s Market Trend Analysis both continue to signal an equity bull market that is intact. However, both research groups offer important context regarding the near term. 2019’s significant equity gains came on the heels of a meaningful drawdown in the fourth quarter of 2018 when US equities (SPY) were down 13.5%. Additionally, in the recent move from the October 2, 2019 low to the January 17, 2020 high, US equities (SPY) gained 15.8%. That context means 2019 started at the bottom of a selloff and ended with a rapid move higher – two short-term extremes.

Perhaps the past two years combined offer a better perspective. 2018 followed a strong 2017 for equities, but US equities (SPY) finished 2018 down 4.6%. The combined US equity performance for 2018 & 2019 is 25.2% or 11.9% annualized. A solid performance, but far less extraordinary than 2019’s 31% gain seems to indicate.