“I continue to believe that the American people have a love-hate relationship with inflation. They hate inflation but love everything that causes it.”

We begin with what we hope will be our final substantive COVID update. The vaccines have arrived and are going into people’s arms at an accelerating pace.

The forceful rise of the markets from March depths continued in the fourth quarter. After stalling out in early Fall, market participants floored the accelerator in November with vaccine approval in tow and the election overhang in the rearview.

It is said that a rising tide lifts all boats, and that goes for monetary tides as well. Watching the market every day, this is exactly what it has felt like; stocks just want to go up...fundamentals be damned.

This letter is one of the more difficult ones to write because things are changing so rapidly. We caution readers that we are not epidemiologists, but it is our job to try, to the best of our ability, to figure out what is going on, and that’s what we attempt to do with this letter.

The year 2019 was the complete opposite of 2018 across investment markets. Across the board nearly every asset class around the world, from bonds to stocks to gold to real estate, was down in 2018. 2019, on the other hand, delivered above average gains across those same asset classes.

Listen... do you hear that? A bubble is popping. No, we aren’t talking about the stock market... well, at least not the stock market you’re probably thinking about. Generally, public companies have the economics to back up their lofty valuations, even if those valuations are, well, lofty. It is the market for private companies, specifically those backed by venture capital (VC), that looks truly bubblelicious.

In early 2007, delinquencies in subprime mortgages began to spike but few took notice. The first real headlines were made in June 2007 when two Bear Stearns hedge funds specializing in the area went down, but few were worried about Bear itself.

A near mirror image of the fourth quarter, the first quarter began with the stock market rocketing higher in a nearly straight line. In one of the strongest quarters since the current bull market began in 2009, it managed to largely erase the carnage of the prior quarter and index levels are now back at all-time highs.

We would like to ring in the new year and provide our predictions for the U.S. economy in 2019.

Since we are necessarily in the predictions business, this letter offers our expectations for equity market returns. We admit our crystal ball is typically cloudy when it comes to what markets will do in the near term. While nothing is ever for certain, we can better view the potential for longer-term stock market returns from a couple of perspectives.

Though the seething pits of humanity at the New York Stock Exchange and Chicago Mercantile Exchange, with their traders all shouting at each other, are largely things of the past, that is still what markets basically are: a bunch of people shouting different things. A market price is the price at which the same amount of people are buying as are selling.

While it might sound obvious, we find it important to remember that knowing about the past only helps you place bets on the future to the extent that the future is like the past.

“We are not enemies, but friends. We must not be enemies. Though passion may have strained it must not break our bonds of affection. The mystic chords of memory, stretching from every battlefield and patriot grave to every living heart and hearthstone all over this broad land will yet swell the chorus of the Union, when again touched, as surely they will be, by the better angels of our nature.” - Abraham Lincoln, 1809-1865 16th President of the United States

It is relatively common knowledge that when interest rates decline stocks ought to rise, and they typically do.