Introduction

It has been a great year for equity investors. The S&P 500 index posted a 31% annual return, the Dow 25%, and the NASDAQ a spectacular 39%. More than $6T of equity paper wealth was created for domestic investors this year alone. Unlike some recent years, global equity investors were not left out of the rally; the MSCI ACWI IMI rose a highly respectable 26% this year.

For a number of reasons, many Americans did not participate in this historic rally. For one thing, roughly half of Americans do not own stocks. For those who do, a volatile third quarter, an inverted yield curve, global fears of a possible recession, uncertainty in Fed policy, political dysfunction in Washington, and various technical indicators encouraged many to limit their participation in the market while motivating others to use various defensive low return investment strategies. For the unsophisticated, it was as simple as being spooked by a too-good-to-be true market and what-goes-up-must-come-down sentiment.

Investing is often confused with trading. Good long-term investing is not for the faint of heart. Longer-term political, economic, and capital market trends, rather than short-term portfolio positioning requiring the need for an accurate forecast, is often the most reliable route for investors. Important secular trends include the continuing democratization of stock market investing, with zero online trading fees and fractional shares. The combination of a robust U.S. economy, a thoughtful Federal Reserve, strong consumer sentiment, and a possible first phase trade agreement with China were fundamental factors driving historic gains in U.S. and global indices.

A Look Ahead

The major issues for investors in 2020 include political risk, the trade war, Federal Reserve policies, the deficit, international markets, and ECB policies under the new president.

Domestic Politics

2020 is a presidential election year. It is also an impeachment year. It is only the third time in U.S. history that a sitting president has been impeached. It is widely assumed that the Republican dominated senate will acquit President Trump of all impeachment articles passed by the House of Representatives. However, how the impeachment trial is conducted in the Senate is likely to have a major impact on the 2020 election and the history of the American experiment in a democratic political system. Who wins is likely to have many long-term economic, social, judicial, and political consequences. This is because President Trump has nearly total control of the Republican Party with policies at odds with many long-standing prior administrations including deficit spending, environmental regulation, immigration, government social programs, support for technology, and foreign policy.