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January, 2020

2018 was a year where cash was king and risk assets finished lower across-the-board. Increased volatility in equities along with large swings in interest rates resulted in a challenging year for investors and investment professionals alike.  2018 culminated with the worst December for equity markets in almost 90 years.  2019 on the other hand was entirely different. Stocks and bonds both performed exceptionally well, ending the year on a high note with equities rallying +4% for the month of December alone.  Aside from a few instances, volatility remained benign and 2019 will be remembered as a year where risk taking was rewarded.

There were a few key drivers to the year over year reversal of fortune. The main catalyst of course was the pivot by The Federal Reserve from a tightening policy to one of easing. After raising interest rates 4 times in 2018 with an additional two hikes projected for 2019, The Federal Reserve completely reversed course and lowered rates 3 times in 2019. Continued strength in the labor markets, optimistic news on a China trade deal and positive GDP growth (dispelling recession fears) were all contributing factors to an outstanding year for risk assets.

Although 2019 was an impressive year for equity markets, much of the rally was a retracement of the dramatic drawdown we witnessed in December 2018 when stocks sold off -16% in 3 weeks. A two-year snapshot going back to January of 2018 paints a more realistic picture with the SPX 500 having gained an annualized +9.75% over that time period. The two-year average is much closer to the historical average of +8% annualized since the inception of the SPX 500 in 1957. Although a repeat of the 2019 rally is unlikely in 2020, returns closer to the historical average are not out of the question. Further progress on a trade deal with China along with an accommodative Federal Reserve could be the catalysts needed for another favorable year.

Along with equities, fixed income markets posted strong results in 2019. Similar to the rally in stocks, part of the gains in fixed income (weaker credit in particular) were a retracement of the pullback in December of 2018. Treasury bonds also staged an impressive rally despite finishing the year off the highs. More importantly, the yield curve (2yr-10yr spread) steepened by 30 basis points. The increase in rates from mid-year lows along with a steeper yield curve may be signs that lingering recession fears are abating. We expect fixed income returns to be positive again in 2020 but a repeat performance of 2019 is highly unlikely.  Given that bond yields are hovering near historic lows, the fixed income markets continue to pose a challenge to investors. In order to obtain higher yields, many investors are willing to sacrifice credit quality which we are not. At Edge, we are using a combination of higher quality corporate bonds, bond ETFs, closed-end funds, preferred stocks, MLPs and REITs in order to generate income.

Looking ahead to 2020, it seems improbable that risk assets will repeat their 2019 performance.  However, there are reasons to be optimistic. As mentioned, The Federal Reserve has switched their stance from restrictive to accommodative. The consumer, labor markets and economy remain relatively strong. Equity valuations are stretched but not much higher than their historical averages and cash allocations remain high. Again, all reasons to be optimistic for positive returns in 2020. 

As always, we thank you for your continued support and wish you all a Happy New Year.


Edge Wealth Management


Please remember that past performance may not be indicative of future results.  Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product made reference to directly or indirectly in this newsletter (article), will be profitable, equal any corresponding indicated historical performance level(s, or be suitable for your portfolio.  Due to various factors, including changing market conditions, the content may no longer be reflective of current opinions or positions.  Moreover, you should not assume that any discussion or information contained in this newsletter (article) serves as the receipt of, or as a substitute for, personalized investment advice from Edge Wealth Management, LLC.  To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing.  A copy of our current written disclosure statement discussing our advisory services and fees is available for review upon request.