Financial Industry Insights from Advisors Asset Management


AAM Viewpoints – Attempting to Right-Size Expectations

A quick canvas of the headlines and sound bites detailing market outlooks for 2020 includes some positivity but also many phrases, such as: get more defensive, returns will be muted, now is not a good time to be investing and don’t expect a repeat of 2019 anytime soon. Given that pretty much every index we track was not only positive in 2019 but posted double-digit returns this is probably the easy stance as many like to under promise and over deliver. However, is this the prudent stance? We’re not so sure.

As mentioned above, 2019 was a banner year for most risk assets and the S&P 500 was near the top posting a total return of 31.48% (price return of 28.88%). A question that comes to our mind is, “How does this rank in history and what tends to happen in the following year?” Looking at the last 75 years we see 13 years when the S&P 500 had a total return greater than 30% and 2019’s total return of 31.48% would place it 12th on that list. So clearly 2019’s return was impressive, but it was not off the chart. In addition, based on history, both the expected total return and the probability of a positive total return go up in the year following a 30%+ return compared to the average year as detailed in the table below.

 Average Annual Total Return Percentage That Total Return is Positive 
 Last 75 Calendar Years 12.62% 70.67%
 After 30+% 13.30% 76.92%

Source: AAM | Bloomberg data | Past performance is not indicative of future results.

However, in no instance did the following year outpace the 30%+ year. So, if we compare to a 30%+ year the term “muted” would apply, but if we compare to the average year “muted” is not the appropriate term. To summarize, based on history we would expect an above-average year to follow last year’s return but not another 30%+ year to materialize. But as always, we don’t want to make investment decisions or predictions in a vacuum or a rear view mirror. Instead we think it’s appropriate to also look at market fundamentals and other factors currently affecting the market.

Euphoria is always something we try to pinpoint and exploit. It usually indicates the bull market is nearing an end and it sometimes manifests itself with a concentrated area of the equity market dominating returns. We are therefore pretty encouraged by the fact that the S&P 500 Value Index outpaced the Growth Index last year (31.92% to 31.13%) and that the delta was very tight at just 79 bps (basis points). In a nutshell, based on the style of investing last year was very broad based. A big sign of euphoria would most likely have seen growth leading the way and the delta between the two styles being much greater than 79 bps. Another big sign would be a ubiquitous supply of great expectations for 2020 and as mentioned above, that is not the case.

Other factors helping us think positively as we enter 2020 include an accommodative FOMC (Federal Open Market Committee), a thawing of the trade war, a predicted resurgence in earnings, global economic stimulus heating up, a very strong domestic employment situation and the presidential election cycle. The latter tends to be very positive for equity returns, especially if an incumbent is running even if that incumbent is not re-elected. In addition, the markets have been given plenty of reasons to selloff over the last 30 days, including the impeachment of President Trump and escalated tensions with Iran, yet the markets have continued to put in new highs.

Given all of this we are very constructive on the return potential for 2020, however, it surely won’t be straight up like we have seen over the last three-plus months (10/2/2019 – 1/17/2020, S&P 500 15.95%, 65.68% annualized). As we have detailed many times before that healthy bull markets are usually characterized by fits and starts, and we tend to see a 3% pullback on average every quarter or so (approximately four times a year). We are now over four months removed from the start of the last pullback (9/12/2019 – 10/2/2019, S&P 500 -4.05%) so clearly, we would not be surprised to see the equity markets pull back in the near future. As always, we would use that opportunity to not only add exposure but rebalance into those areas we recently highlighted in our Best Ideas for 2020.


CRN: 2020-0110-7909 R

This commentary is for informational purposes only. All investments are subject to risk and past performance is no guarantee of future results. Please see the Disclosures webpage for additional risk information at commentary-disclosures. For additional commentary or financial resources, please visit



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