CANFIELD, Ohio — With a 30% plus total return for U.S. equities in 2019 and an extremely accommodating Federal Reserve Bank, the team at Farmers Trust Co. notes that this past year has seen quite the resilient market but cautions against an increase in inflationary pressures and potential volatility in the coming year.
U.S. equity markets recorded its best year since 2013 with the S&P logging a total return of 31.49%, the Russell 1000 Growth Index up 36.39% and the Russell Value Index up 26.54T.
The Fed cut interest rates three times during 2019 and this lower interest rate policy in addition to long awaited wage inflation, is the perfect recipe for price inflation on goods and services – as well as commodities and energy, the trust company says.
“Volatility could be an ongoing issue in the coming year, particularly in regard to the upcoming 2020 presidential election. Any disruption to the current pro-business regulatory and administrative climate could bring some turbulence in the markets,” says John D. Stewart, senior vice president and chief investment officer.
One of the reasons the market has remained so resilient is that the potential for a recession in the next 12 months appears extremely low based on the strength of underlying economic data. In addition, corporate earnings are expected to grow, but slower than the 20% plus pace in 2018.
Despite some recent coronavirus-related volatility, liquidity conditions remain such that stock prices (at least for now) appear to have further upside potential. “This situation is in part due to a resumption in the Federal Reserve increasing its balance sheet; in other words, they are pumping money into the financial system once again,” Stewart adds.
Retail investors also remain under-invested in equities and are holding a record level of money market funds. This causes any pullback in the market to be quickly met with buyers who fear missing out on further gains in the stock market. “We believe this dynamic could be sowing the seeds for a market correction if valuations expand much further — as they are already somewhat stretched — and excess liquidity becomes exhausted,” Stewart says.
Also, as fourth quarter corporate earnings results come in, Farmers cautions that any disappointments in those reports could provide the catalyst for some volatility.
Lastly, after a long period of under-performance, Farmers has been increasing exposure to commodities, which should benefit both from inflationary pressures as well as central bank monetary stimulus. In addition, real estate is an asset class that has performed well (nearly double the S&P 500 over the past 15 months) and should continue to perform well under these conditions.
In 2019 real estate was up more than 29.01% for the year. In fixed income portfolios, Farmers Trust Co. continues to shun high-yield (junk) bonds while favoring Treasury Inflation Protected Securities (TIPS) as inflation is likely to accelerate in 2020.
Farmers Trust Co. manages over $1 billion in assets and has offices in Youngstown, Howland, Canton and Wooster. It is a wholly-owned subsidiary of Farmers National Banc Corp.
Copyright 2020 The Business Journal, Youngstown, Ohio.
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