2019 Was A Good Year, But Not A Great Year.

Yes 2019 was a good year in the stock market, but it was no where near the boffo year that most on the Street are bragging about. If you were to listen to the financial press, you would think that this was one of the all time best years for stocks in years. A real home run, with returns for the year running at nearly 28%. That this was year to end all years. And indeed, the press is correct IF you just look at the 365 days that make up the calendar year 2019...

Well… Wall Street really needs to get a grip. Yes 2019 was a good year in the stock market, but it was nowhere near the boffo year that most on the Street are bragging about. If you were to listen to the financial press, you would think that this was one of the all-time best years for stocks in years. A real home run, with returns for the year running at nearly 28%. That this was a year to end all years. And indeed, the press is correct IF you just look at the 365 days that make up the calendar year 2019. But to do so ignores what just leads up to this fabulous 12 months.Let me take you back to December of 2018, just the month before fab 19 began.Our story really begins in mid-2018, when the Federal Reserve really began to put the clamps on the financial systems. In a strategy they called “normalization” the Fed firmly placed both feet on the economic brakes, they even tried to put on the parking brake, and set the transmission into park. The fed began by raising interest rates. And then they withdrew excess monetary reserves by shrinking their Fed's 4 trillion dollar balance sheet.It was a two-fold strategy, that began by making funds more expensive to borrow, raising rates. This alone was a major factor in slowing the economy. In a highly leveraged system, like ours currently. This move caused the lower-rated debtor, like many corporations, to see their debt service explode. Their monthly cash flow was squeezed. And firms were beginning to think of downsizing. We especially saw this in the retail sector, where most of their stores are leased, and their inventories financed. It didn't take much of a reduction in sales to put retail in a world of hurt when the Fed raised rates. But raising rates was only half of the equation. The other half was reducing their balance sheet. Effectively taking funds out of the commercial banking system. Reducing the number of loans that banks could make. Now it took a few months for all of this to hit Wall Street. But hit it did. And by December 2018, the Street saw that we were in real trouble. If things continued as they were, it was inevitable that the economy would slow, and likely go into a recession. This was an unexpected and unwelcome surprise for Wall Street. And the result markets began to fall. The Dow, for instance, fell nearly 20% from its highs made just a couple of months before in September.As one wag put it…IT was fast, but it sure felt like a bear market.

And so, that's how we began this year, in a hole.We had just come through one of the shortest bear markets of all time. Created essentially from the very restrictive monetary policy of the Federal Reserve. And as you all know, the Fed has since reversed its position, and taken a “Mid Course Correction.” This has enable to the markets to snap back to their prior levels. And resume this march to higher levels.So how are we to view the markets currently as we prepare to close the books on 2019?To me, it is more reasonable to see these markets within the context of a misstep in Fed monetary policy. Take away the Fed's 2018 tightening, and the subsequent mini-bear market in stocks, and you would have a Dow, for instance which stands just 6% over the September 2018 highs.A 6% gain, that's a pretty good year. Close to the historic average return for the Dow. But nowhere near the 28% that the pundits are talking about.So give the Fed a mulligan, a do-over, and recognize that this market is performing right in line with its historical average…

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