There are only three things certain in life: death, taxes and failing to follow through on one’s New Year resolutions. Perhaps a fourth truism is witnessed in financial markets each year: equity strategists are perennially bullish and collectively never call a recession. This glass-half-full view could be in part why equity investors are always last to leave the party as recessions materialize. More importantly, consensus is generally too optimistic when the cycle deteriorates (2000-2002, 2007) and too pessimistic when the market rebounds (2003, 2012). Today, Wall Street strategists are the least bullish on the S&P 500 Index in the last 14 years. This collective caution may bode well for next year’s market returns.
Coming into 2019, ClearBridge was more optimistic than consensus. We believed that recession fears were overblown given the solid green output of the ClearBridge Recession Risk Dashboard. We focused on strong parallels with the 2018 economic and market backdrop and historical periods such as 1984 and 1994. Our review of these past environments suggested that absent a recession, markets should bounce back following each reset, which played out once again in 2019. With the benefit of hindsight, we believe the 1994-1995 analogue is more applicable to the current environment. If the economy and market continue to follow the historical pattern, investors should be pleased. 1996 was a robust year for equity investors, with the S&P 500 delivering a price return of 20 percent.
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