Dear Fellow Shareholders:
I am pleased to enclose your Fund’s annual report for the year ended December 31, 2019.
To the surprise of many investors, the stock market had a banner year in 2019, posting its biggest gain since 2013, as the S&P 500® Index rose 31.49%. The stock market was buoyed by moderate economic growth, low inflation, better-than-expected corporate earnings and an accommodative Fed that cut rates three times during the year. All the S&P 500® sectors posted double-digit gains in 2019, with the Technology and Health Care sectors performing the best, while the Energy sector trailed all other sectors with a gain of 11.8%. It is interesting to note that two stocks, Apple and Microsoft, accounted for 14.8% of the S&P 500® return.
During the year, the market climbed the proverbial “wall of worry” as concerns around global economic growth, disruptive trade wars and tariffs, geopolitical factors and impeachment issues dominated investors’ concerns. In spite of these headwinds the market hit 19 all-time highs during the year.
As stock prices trended higher, investors expressed increasing concern over valuation levels. The market ended the year trading at a forward price/earnings (P/E) multiple of 18.4X earnings. Although this P/E ratio is above average, it is well below the prior multiple peak level of 24X reached in the year 2000. Also, in terms of price appreciation, over the past five years ended December 31, 2019, the S&P 500® index is up 61%. Comparing that appreciation to the 5-year 89% gain prior to the 2007 peak, and the 210% gain prior to the 2000 peak, suggests the market has more room to run.
Market Outlook 2020
The stock market outlook for 2020 looks bright to start the New Year. Stock market bulls believe that business investment, corporate earnings and global economic growth will trend higher in 2020. The anticipated growth is supported by accommodative Fed policy, higher consumer spending, low unemployment and higher wage growth. Stock market bears highlight risks associated with stock valuations, geopolitical uncertainties, trade/tariff negotiations, Brexit outcome and the upcoming U.S. elections. We continue to be generally optimistic about the prospects for equity returns in 2020. The U.S. economy remains strong, global markets are improving, company earnings are poised to surprise and there appears genuine progress on trade talks and various geo-political issues. The Presidential election outcome will be the marquee event, later in the year, which could lead to a shift in sector leadership and asset classes’ attractiveness.
Although we expect positive returns in 2020, it would appear unlikely that the markets will exceed the returns realized in 2019. We expect market gains to roughly mirror earnings per share growth, assuming no increase in market multiples. However, as long as the business cycle expands, the opportunity for excess returns is possible as earnings catch up with valuations. Typically a late-cycle expansion period has ended with investor euphoria and a stock price melt-up.
It is important to remember that bull markets do not end of old age. They typically end from imbalances in the economy as reflected in slower economic growth, excess inventory levels, higher inflation and a tightening Federal Reserve monetary policy. We can never know in advance just what will start a market correction, but it is these declines that create mispriced assets and attractive buying opportunities.
Following is information summarizing each Fund’s performance, specific holdings that enhanced or detracted from performance, top security holdings and investment strategy.
We thank you for being a valued shareholder and providing us with the opportunity to help you achieve your long-term investment goals.
Robert S. Bacarella
President, Founder and Portfolio Manager