Note – this Monthly Update is being written on December 24 and 26. Generally, it is safe to assume that very little will change in the tail end of the holiday season. However, such fireworks certainly occurred last year when Wall Street reversed back upwards more than 6% in the last four trading days of the year Perhaps, we can consider that as the ‘exception that proves the rule’ – but no guarantees.

Wall Street rolled on in December as, at least through the morning of December 26, a fully diversified equity portfolio will have added another 2+%, bringing the rally since the August low to more than 12%, and up nearly 27% for the year. In S&P 500 terms, the year’s return is now north of 31% and, yes indeed, more than a full 40% since the absolute low set on the morning of December 26, 2018. According to my friends at Strategas Research Partners, this is a 95th percentile event, for any 52-week period. In calendar year terms, going back to 1825 – that’s 194 years – in only ten was there a calendar-year rally that eclipsed the 40% level, and not one since 1958. This also brought the return (again, in S&P 500 terms) since the August 5 low to 14% and more than 8% for Q4 and, for the first time since 1984, even as bonds (a ‘risk-off’ asset class) rallied strongly, so did every ‘risk-on’ asset class – stocks, commodities and real estate. I will further elaborate on the historical perspective below.

The size of the economy is at an all-time high

Certainly, one can cite the palpable easing of global trade frictions, most particularly with China (some call this the ‘POTUS pivot’) as well as an otherwise quite strong domestic economy, as positive factors. One can quibble, as I often have and still do, with the rate of change in economic growth, as well as its fairly disparate construct. But there is no denying that the absolute size of the economy is at an all-time high. The resulting increase in confidence has no doubt led some large investors to bring some money off the sidelines and into stocks.

The Federal Reserve’s new money printing endeavor

In my opinion, the real story of December and, now the wisdom of hindsight for all of Q4, was the massive new money-printing endeavor of the Federal Reserve, required to keep the banking system afloat. Every economic entity, including ourselves as individuals, needs cash. With the massive deficits created by the 2017 tax cuts plus the demands from high-octane hedge funds to fund its FOMO-based stock buying frenzy*, the banking system has come perilously close to running out a number of times since mid-September.

This should end soon, though. With the massive January 15 estimated tax payment due date at the beginning of a quarter (instead of Sept 15’s at the end), this should actually help keep Uncle Sam off the Fed’s dole rather than at the front of it (and the calendar turn to 2020 resets the hedge fund performance clock). So I believe this money-printing will become a low-to-zero factor quite quickly.

So, if indeed that’s true, what happens to stocks in 2020?

I’ll hit this from three directions – 1) the historical perspective, 2) the current consensus, and 3) for better or worse, my own opinion.

I noted earlier that this awesome last-twelve-month rally is pretty rare, happening only 5% of the time. Strategas also notes that the follow-on for stocks over the short term (1-3 months) is fairly weak (plus-or-minus 5% or so) but that returns over the full year have been pretty good, 10% or more. Sign me up!

A deeper look indicates that most of that above-average performance occurred when the first rally came out of a true bear market - and an accompanying economic recession or near-recession (1991-92, 2003-04, 2009-10) – or from a true economic surprise (2013-14). The big exception to this, and what today’s mega-bulls point to, is the ’95-’96-’97-’98-’99 period of endless double-digit returns, for an aggregate tripling of stock prices. Fair enough, I suppose, although I’ll submit that, in addition to a generally friendly Federal Reserve, we had much significant bi-partisan, growth-oriented legislation passed that just kept the party going, including during its own quite significant political foibles. Good luck with that in 2020. Aside from those, the very few big rally years proved quite unsustainable.

As for current consensus, I can’t remember a Wall Street more ‘bulled up’ that it is now, except at prior major market peaks. In order to be truly bullish on stocks for the year ahead from today’s 3200+ S&P 500, one needs at least a 3500 target, for a 10-11% return including dividends…but Wall Street isn’t stopping there. Many forecasts are now at or above 3600. I’ve now seen 4000 as a target twice, a full 25% above today’s level. Out of dozens and dozens of guests on CNBC these past couple weeks, I might have seen only a couple with even flat forecasts for 2020. Though my memory of the late ‘90s is somewhat blurry now, I don’t recall any such bullish unanimity, at any point until the very end in early 2000. It is 100% true that when everybody has bought all the stocks they can possibly buy, that’s the top. Hmmmmmm……..

And finally there’s my take. Back in my prior perch, I used to lay out a very long and even quite-specific narrative for the entire year, encompassing as many potentially market-moving factors as I could. I will spare you that here. Suffice to say, in any given national election year, politics matter and matter a lot, due to the clarity (or lack thereof) over the direction of future macro-economic policy. Given the mega-polarized nature of the nation, and assuming monetary policy is at least mostly neutralized, then after politics, everything else is just details for Wall Street.

As background, if forecasting 2020 is to be truly a back-and-forth game based on a political coin-flip, then it would be clearly a case of ‘where you stand depends upon where you sit’. But it’s not. Wall Street has already essentially voted, with the vast majority of market pundits (75+%), based on their own Wall Street prism, conceding the election to the incumbent. That doesn’t mean they’ll actually vote as individuals that way, but history is pretty clear. As WSJ’s Gerry Seib noted in his Capital Journal piece this past Tuesday, based purely on current economic satisfaction and optimism surveys, the incumbent should be a prohibitive favorite right now, with an aggregate approval rate well over 50%, perhaps even approaching 60%.

But it’s not – it’s stuck in the mid-40s, even after a recent upward blip. So, even though Wall Street may well have already priced in re-election, Main Street has not. And the last I heard, it’s Main Street’s vote that finally matters. Hmmmm…..

So two things can go ‘wrong’ for stocks in 2020. The first is simply some reduction in the money-printing by the Federal Reserve. If/when the spigot is turned off, that support for stocks goes away, which in my opinion no amount of increase confidence based on any level of economic re-acceleration can offset. Traders trade and there’s a saying on Wall Street that ‘if buying stops working, then it’s time to do some selling’ and the second is any perceived change, by Wall Street, in the political end-point. History is also equally very, very clear that any loss, or even potential loss, by the incumbent party is met with a relatively weak stock market right up to and perhaps after the actual election itself.

Accordingly, our positioning remains a small tactical underweight to stocks as we begin 2020, continuing to cheer them on ‘from underneath’. Sure, I wish I’d been more bullish than I was. But, to repeat what I wrote a month ago, the relative opportunity cost of being this level of underweight in such a big up-year is barely a rounding error. If my caution is proven equally wrong in ’20 as it was in ’19, we’ll all be way, way more than okay.

From all of us at KLR wealth, thank you to our colleagues, friends and clients for your continued support. Please know we are here for you every day. Not every year will turn out as wonderful as 2019 and somewhere in the future, perhaps in 2020, stocks will waver and even correct, as occurred in 2018. But our commitment to you will never waver (nor correct).

*FOMO (Fear of Missing Out) –discussed at length in last month’s Update.