January 10, 2020
This financial article from December 2018 ranks as my favorite. Somehow gracing the NY Times Styles section, of all things, makes it so much better. I never considered that investing should be threaded into a discussion of Louis Vitton or Christian Dior. I love the directive confidence of the title. As if it was pre-ordained that the market was going to fall, and the only thing left to do to tidy up 2018 was to acquire a helmet and a prayer book.
The crash didn't happen. Instead, the markets had one of their best years in decades. The S&P 500's 33% and U.S. real estate's 30% returns were impressive, but arguably more impressive was the breadth of asset class returns. In a complete reversal from 2018, every major equity class index we use was up over 20%, and most Treasury indexes were up from 6% to 16%.
Blowing through crash mongering early in the year, and then the hand-wringing over an impending recession, the market climbed quickly in January 2019, and steadily for almost every other month of the year, with two periods in the summer being the exception.
Those of you who have met me, or any One Day In July advisor, know that our true interest lies in cash flows. And this is where 2019 scored an impressive metric. The rate of dividend increase on every equity index we commonly use beat the long-term S&P 500 average of 6%. International small cap dividends were up a whopping 36.3% in a year, emerging markets surged 31.1%, and U.S. small capitalization companies rose 25.7% on their dividend payout.
This matters. To be a good investor, you need inbound cash flow, and the indexes delivered in spades in 2019. To be a great investor, you need the iron stomach to buy indexes that are going down, out of favor with other investors. In this regard 2019 did not afford us as many opportunities.
While the cash flow increases were impressive, keep in mind that the overall dividend payout rate (not the increase, the current rate), is not impressive by historical standards. Businesses were catching up. Real estate yields just over 3% today. At the nadir of the financial crisis that number was closer to 16%.
Additionally, S&P 500 profits barely budged in 2019, and after inflation they were down. So the 2019 return is entirely speculative - investors are betting that businesses will do better in the future than previously expected.
One final note. When recession talk swirled over the summer, our risk protection strategy kicked into high gear for clients. The long-term Treasury index, at one point in August, had surged 24% in 8 months, and this in a year that opened with interest rates at 2.5%.
Don't underestimate the importance of this. Many of you noticed that something was offsetting the gloom and doom. This was an instructive financial anecdote leaving fingerprints.
An anecdote not good enough for the Styles section, but not bad.
Sources: S&P long term dividends: NYU Stern Prof Adamodar. Dividend rates vanguard.com and nasdaq.com for Vanguard respective index funds. All returns total returns. S&P 500 profit numbers from
Shelburne, VT 05482
Burlington, VT 05401