Markets Update: A Year in Review
2019 was an historic year for investors across the globe with every major asset class finishing positive for the year. For U.S. markets, 2019 was one of the best years for both U.S. stocks and bonds. Only 4 other years were better for both U.S. stocks and bonds at the same time (’85, ’89, ’95, ’97 – over a 94-year history since 1926)). These extraordinary investment returns occurred despite a news filled year. We had the reversal in the Federal Reserve’s policy on interest rates and their balance sheet, the sputtering of manufacturing on a global scale due to trade protectionism primarily between the U.S. and China, the uncertainty of Brexit, and the impeachment of the President. For investors that remained disciplined and invested, this was a year to remember.
Furthermore, when you look back on the decade as a whole, U.S. stocks were up 13.6% annualized, the 4th best decade since the 1930s (out of 9). U.S. bonds on the other hand had their lowest decade return since the 1960s, but still returned 3.8% for the decade.
BONDS
Fixed income had an unexpectedly large positive year off the back of declining interest rates – when interest rates drop, bonds prices rise, especially for long-maturity bonds. U.S. bonds returned 8.72% and global bonds earned 3.86%. After a shaky 2018, the Federal Reserve paused their planned increases in interest rates and reversed
course by lowering interest rates during the third quarter, quickly enacting three rate cuts in July, September, and October. They have since indicated that they don’t expect any further cuts or hikes without substantial data from the economy to do so. Other major central banks are keeping policy easy in the face of uncertainty around global trade and inflation. We are confident the bonds in your portfolio are well positioned to be an anchor regardless of what 2020 holds.
STOCKS
Stocks had a stellar run around the globe with above average returns and below average volatility. The U.S. stock market led the charge with a 31.5% return for the year. Who could have predicted that at the end of 2018? In addition to the U.S. having a strong market, developed international stocks increased 22.5% for the year, and emerging market stocks were up 18.42%. All in all, these returns are remarkable given the amount of uncertainty in trade during 2018 and 2019. Now the question becomes, “is the stock market rich?” to which the answer is a resounding, “sort of, but….only in the U.S.” We are not seeing valuations at exuberant levels in the United States and they have plenty of room to run to get there. Internationally, Developed Market stocks are at their average valuations and Emerging Market stocks are trading at a slight discount. All in all, this gives us conviction in our ongoing strategic overweight toward foreign markets.
ECONOMY
The U.S. economic expansion is now the longest in history at 126 months. By many measures, both the U.S. and the overall global economy are still on firm footing. In the U.S., unemployment rates remain well below the historical average, wage growth has trended above core inflation, and inflation itself remains low. The economic indicators we follow do not show a recession is imminent in the short-term, but we do recognize a slowdown in growth is plausible. As for what weighed most on the global economy during the year, trade, a short-term resolution seems to have been attained. As we entered the end of 2019, China and the U.S. were finalizing “Phase 1” of their trade agreement, which is set to be signed, barring any hiccups, in early 2020. Our expectation for what is going to dominate headlines and markets in 2020 comes down to the resolution of both the Democratic primary and the Presidential elections.
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Topic of the Quarter: Hindsight Is 20/20. Foresight Isn’t.
The year 2019 served up many examples of the unpredictability of markets.
Interest rates that US policy makers expected to rise fell instead. American consumers’ confidence weakened as the year began,1 and news headlines broadcast fears of an economic slowdown. But investors who moved onto the sidelines may have missed the gains in the US stock market. As of the end of October, the S&P 500 was up more than 20% for the year on a total-return basis. That puts it on course for the best showing since 2013 should that gain hold through December.
Outside the US, Greece—the site of an economic crisis so dire some expected the country to abandon the euro earlier this decade, and a country whose equity market lost more than a third of its value last year—has had one of the most robust stock market performances among emerging economies in 2019. On top of that, Greece issued bonds at a negative nominal yield, which means investors paid for the privilege of lending the government cash. Taken as a whole, it’s a reminder that the prediction game can be a losing one for investors.
EXHIBIT 1. SHIFTING CURVES
Yields on US Treasuries of various maturities since the end of 2018
UP OR DOWN?
A closer look at interest rates and the bond market shows just how unpredictable asset performance can be. Going into 2019, Federal Reserve officials expected economic conditions to support raising a key interest rate benchmark twice. Instead, policy makers lowered it three times.
In the market for US Treasuries—where market participants set interest rates—the yield curve that tracks Treasuries inverted for the first time in more than 10 years, as seen in Exhibit 1. Some long-term yields fell below some short-term yields over the summer. What’s more, yields on medium- and long-term bonds were at historically low levels at the start of the year, but they fell even lower by the end of October. Investors who made moves based on the expectation yields would rise in 2019 may have been disappointed in how events ultimately transpired.
EXHIBIT 2. CHANGES IN THE RANKS
Performance of equity markets in 23 developed and 24 emerging economies.
TRADING PLACES
Events weren’t any easier to anticipate in the global equity markets, where no evident link appears between markets that performed well last year and those that have excelled this year, as Exhibit 2 shows.
Among the 23 developed market countries,2 only one country was a Top 5 performer for 2018 and 2019: the US. Last year’s strongest performing market— Finland—ranked 22nd this year through the end of October. Among emerging markets, Greece swung from a 37% decline last year to a 37% advance this year through the end of October.
PERENNIAL WISDOM
History has shown there’s no compelling or dependable way to forecast stock and bond movements, and 2019 was a case in point. Neither the mainstream prognostications nor the hindsight of recent strong performance predicted outcomes in 2019.
Rather than basing investment decisions on predictions of which way debt or equity markets are headed, a wiser strategy may be to hold a range of investments that focus on systematic and robust drivers of potential returns. Investors who were broadly diversified across asset classes and around the globe were in a position to potentially enjoy the returns that the markets delivered in 2019. Last year, this year, next year—that approach is a timeless one.
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