What a year it has been. I am reassured by the resiliency of the U.S. financial markets as companies continue to thrive in the midst of policy challenges and political turbulence. Trade tariffs, impeachment, and interest rates have dominated the news headlines, while Brexit and protests in Hong Kong have also been major international stories.
What has not dominated the headlines is the strength and record-breaking performance of this market. U.S. equities posted double-digit positive performance in 2019, and all three major indices, the S&P 500® Index, the Dow Jones Industrial Average, and the NASDAQ Composite Index, reached all-time highs in December.
Every bull market experiences volatility and pullbacks, and this extended bull market is no different. Since 2010, there have been 16 pullbacks of 5-10% and six corrections of over 10%. But what is interesting is not how quickly the declines take place, but rather how swiftly the market regains and surpasses its prior highs. With each decline, many investors and commentators predict that finally this bull market is out of steam. But I ask myself, “Why?”
What I see is a healthy economy and stock market, with fundamentals in place to support a continued bull market. Although slightly above long-term averages, stocks are trading at reasonable valuations, with the Dow trading at 16x forward earnings per share and the S&P 500® at 17x. At the same time, the U.S. economy is growing at a sustainable pace of 2-3%, corporate profits continue to outperform expectations, and cash continues to build on corporate balance sheets. With over $5 trillion in cash and marketable securities on the balance sheets of the S&P 500® companies alone, corporations are returning cash to shareholders through share buybacks and dividends. Share buybacks by S&P 500® companies could hit $1 trillion in 2019, surpassing 2018’s record $800 billion, and dividend payments by S&P 500® companies are estimated to increase 8-9%. Unemployment continues to be at historically low levels, while wages are growing. Interest rates are also at very low levels, which should support equity prices. Finally, overall consumer confidence remains positive.
To quote Sir John Templeton’s famous saying, “Bull markets are born on pessimism, grow on skepticism, mature on optimism, and die on euphoria.” If you look back to the beginning of the great bull market that began in 1982, only six of the past 37 years ended with negative total returns: 1990, 2000, 2001, 2002, 2008, and 2018. With the exception of 2018, which was characterized by volatility but no euphoria, the other down years were marked by euphoria in either real estate or dot coms. I have been saying for a number of years that I see no signs of euphoria in the market, and I remain confident in the strength of the market today.
Thank you for your continued trust and investment in the Hennessy Funds. We believe that there continue to be great opportunities throughout all parts of the market, and we remain steadfastly focused on managing our high-conviction portfolios for the long-term benefit of our shareholders.