Let me begin 2019 expressing my gratitude to you for your confidence and trust in us. Your financial strength is our raison d’etre. I’d also like to thank everyone on our kind and industrious team because they make our days amazing—day after day. I want to thank our extended team of professionals, including brilliant and humble folks at Athena Invest and Litman Gregory. I owe thanks to our experts in accounting, law, insurance and other professions. And finally, I’d like to thank our friend and guide Nick Murray, who helped me find many of the following words, so that I might share with you our combined, hard-won, long-term, real-world perspective on the year that just passed.
In just a few minutes, when you are done, I hope you feel more calm, you feel safe, and that you give yourself permission to tune out the news.
2018 was a strange year. Most importantly, last year was one of the truly great years in the history of the American economy. 2018 was, by far, the best year since the global financial crisis ten years ago. Paradoxically, it was also a year in which the equity market could not get out of its own way.
I struggle to limit a list of good economic news for 2018. Worker productivity—the long-run key to economic growth and a higher standard of living—surged. Wage growth accelerated. Household net worth rose above $100 trillion for the first time. Household debt relative to net worth remains historically low. Unemployment fell. For the first time in American history, the number of open job listings exceeded the number of people seeking employment.*
Earnings of the S&P 500 companies, paced by robust GDP growth and significant corporate tax reform, leaped upward by more than 20%. Cash dividends set a new record. Total cash returned to shareholders from dividends and share repurchases since the trough of the Great Panic reached $7 trillion.*
Equity markets were a different story. Having gone straight up without a correction throughout 2017, the S&P 500 came roaring into 2018 at 2,674. Was the market ahead of itself? In February, we experienced a 10% correction, followed by several months of consolidation. The advance resumed as summer waned, with the Index reaching a new all-time high of 2,931 in late September. The S&P 500 gave way to a second correction and ended the year at 2,506.*
As the year turns, the major economic and market imponderable is trade policy. In the larger sense, this is an inquiry about President Trump. The economist Scott Grannis recently said that “Trump has managed to reduce tax and regulatory burdens in impressive fashion, but his tweets and his tariff threats have created unnecessary distractions and unfortunate uncertainties, not to mention higher prices for an array of imported consumer goods.” Trade and other uncertainties—perhaps chief among them Fed policy and an aging expansion—were weighing heavily on investor psychology as the year drew to a close.
For whatever it may be worth, my experience says we are going to be OK.
Negative investor sentiment—and the resulting equity price weakness—have potentially enhanced the opportunity for a patient, disciplined long-term investor like you and me. As Warren Buffett wrote in his 1994 shareholder letter, “Fear is the foe of the faddist, but the friend of the fundamentalist.”
Dear friend, please raise any questions prompted by this very brief summary with your wealth manager. That's why we are here. Your financial strength is our raison d’etre.