This month’s clip features Brian Jones, CFP® (one of the Owners of CJM) and Kevin Donovan, CFA (CJM’s Portfolio Research Director) recapping last year’s markets, a deep dive into T. Rowe Price Capital Appreciation Fund, and their expectations for 2020 and beyond.

Brian T. Jones, CFP®
Brian T. Jones, CFP®Chairman, Financial Adviser
Kevin E. Donovan, CFA
Kevin E. Donovan, CFAPortfolio Research Director

Brian: Hi, I’m Brian Jones, chairman at CJM Wealth Advisers, and I’m joined here today with Kevin Donovan, our portfolio research director, and this is the 2020 January market update.

Brian: Kevin, I want to talk to you real quickly about 2019 and the market performance we saw with regards to the equity and the fixed income markets. What’d we see?

Kevin: We saw everything go up. 2019 was a really, really good year in the markets. S&P 500 was up 28%, almost 29%. We get a return like that, that’s a good year historically. What happened was everything is set up really well for us to have a good 2019. We saw a big sell off in the market in the fourth quarter of 2018, and that ended on the last week of the year, so stocks rebounded strongly from there. Market sentiment changed, people were fearful of a recession and trade wars at the end of 2018, and those fears kind of faded away during the year. We saw the fed cut rates throughout the year. They switched from raising rates throughout 2018 to cutting them in 2019. That gave investors confidence, sent stock market up. When the fed lowers rates, bond yields go down. So when bond yields go down, prices go up, and bonds also had a very strong year. The main index there was up almost 9%. International also had a pretty good year, not as good as the US, but developed markets were up 18%, emerging markets were up 15%, so all across the board, it was a good year for the markets.

Brian: Now that strong performance that we saw in 2019, when we compare that to what clients experience in 2018, if we average those two years out, it’s kind of a tough market in this period of time, would you say?

Kevin: Yeah, if you look at two year returns, because we had the big sell off towards the end of the 2018, it may not seem like we had a great period, but the strong rebound in 2019 really helped our client portfolios.

Brian: Now is there fund in particular that you can point to with regards to … That a lot of clients own that had kind of some interesting performance here in the last 12, 18 months?

Kevin: Yeah. One of the funds that I really liked that we hold in a lot of our client portfolios is T. Rowe Price Capital Appreciation Fund. Now it’s classified as an allocation fund, which means it can own a combination of stocks and bonds. So it typically owns 50 to 70% stocks, and the rest in bonds. Now in 2019, I look at all of our funds and how they perform relative to their peers, and if a fund is in the top half of the performance, then that’s pretty good. If it’s in the top quarter, it’s very good. If it’s higher than that, it’s outstanding. T. Rowe Price Capital Appreciation was in the third percentile of funds in its allocation category, so that means it did better than 90% of the other funds, which is just an amazing performance number, but that’s just one year. We like to look back and see how funds perform over the longer term. Now some funds do good when the stock market goes up, some do good when the stock market goes down. There aren’t that many that outperform on both ends. This fund has done an incredible job over all time periods. It’s in the top one, two or three percentiles, going back three years, five years, 10 years, 15 years. During all those time periods, it was in the top one, two or 3% of its allocation category. Now I have to say, the typical disclosure, past performance does not guarantee future success or future performance, but looking back over history, it’s been a really good fun for our clients to hold.

Brian: Excellent. Now what about expectations for this year in 2020?

Kevin: Well, I wouldn’t expect a repeat of 2019. Everything was up, and that rarely happens in the stock market. Stock valuations are pretty high right now. We saw a big increase in stock prices, but we didn’t really see a lot of earnings growth last year. So if you look at price earnings ratios, you had the price go up and earnings not really go up, so those valuations are really high right now. We would have to see a pickup in earnings, I think, to see a meaningful increase in stock prices from this point. It doesn’t mean we won’t see it, and we hope we do, but I wouldn’t expect a 29% increase this year after what we saw last year. On the bond side, bonds did well last year because the fed cut rates and yields went down. We don’t expect the fed to cut rates this year. They had said that they’re going to pause and see what the effect of those rates cuts have been and how the economy performs. So bonds won’t have that behind it either in order to see an increase in price. So we’re expecting to see more muted returns in 2020.

Brian: Okay, so realistic expectations and respect for time here in 2020, or patience.

Kevin: That’s right.

Brian: Excellent. All right. Well that’s all the time we have. Thanks for joining us.