Monthly Markets Memo - December 2019
by Dan Zalipski, CFA
We are days away from closing out the first decade in U.S. history without a recession. From a market perspective, the past ten years have been truly remarkable. The decade began with the U.S. emerging from the financial crisis in the midst of unprecedented market intervention and monetary policies.
We saw a European debt crisis, a debt ceiling fight that resulted in the first-ever downgrade of U.S. sovereign credit, disrupted energy markets as U.S. crude oil production exploded higher, negative interest rates, Brexit, and a US-China trade war just to name a few. As extraordinary as the decade was, 2019 in and of itself was a good year.
2019 was a year where everything seemed to work. Both stocks and bonds, international and domestic, posted strong returns. The S&P 500, at the time of this writing, is up over 25% for 2019. There is an issue of perspective that is worth highlighting. The fourth quarter of 2018 saw a dramatic sell-off in the equity markets that did not bottom until Christmas Eve. This resulted in 2019 starting from a relatively low point, creating an illusion of incredibly strong returns for the year. The S&P 500 peaked on September 17, 2018 before shedding ~17%. The market would not get back to that September 2018 high mark until late April of 2019. Stocks did continue to move higher throughout the remainder of 2019 but are only up ~8% from where it had previously peaked in September of 2018. Focusing solely on that 25% return can distort one’s perspective and expectations of future returns. This also highlights how something as simple as the calendar turning over can have a sizeable impact on the data. An 8% return is still good and much closer to historical averages, but it doesn’t sound as exciting as 25%.
Stocks weren’t the only asset class putting on a show this year. Fixed income indices have all posted strong gains as the Fed’s monetary policy reversed course. Coming into 2019, investors were expecting rate hikes, but by the end of the year the Fed cut rates three times. The Fed admitted they raised interest rates too high in 2018 and looked to take corrective actions to support the economy. The yield on the 10-year treasury fell from a peak of 3.22% in October of 2018 to a low of 1.50% by September of 2019, reflecting the policy adjustments from the Fed. As yields plummeted, bond prices moved higher producing extremely strong returns for the asset class. With the Fed now on hold, citing a much higher bar for additional rate cuts, the outsized returns fixed income experienced this year are unlikely to continue to the same degree going forward.
The market’s rise this year was not a smooth and leisurely one. Volatility was present throughout the year, primarily driven by a will-they-won’t-they (cut rates) Federal Reserve, and an escalating tit-for-tat trade war with China. The U.S. stock market saw two pronounced selloffs during the months of May and August only to recover, pushing the markets to all-time highs throughout the fourth quarter. The Fed met recently in December. They did not make further adjustments to interest rates and indicated that a high threshold now exists for further rate moves in either direction. The Fed’s latest forecast shows no rate movements until 2021. The trade war has also seen some progress. The Trump Administration indicated that they are ‘very close’ to a ‘phase-one deal’ with China. The deal is expected to include some combination of China purchasing U.S. agricultural products with the U.S. reducing existing tariffs on the $360 billion worth of imports. The latest developments regarding both the Fed and the trade war give investors hope that the two biggest drivers of 2019’s volatility will not linger into the coming year.
While odds of recession in 2020 are low, the path for higher equities appears difficult. As covered in this month’s Market Minute, future returns are expected to come in below their historical averages. This is due to the equity market’s higher valuation during a time when corporate earnings are attempting to reverse three quarters of negative growth. In addition, yields remain historically low across the fixed income landscape, implying investors will earn less from that asset class. Investors would be wise to adjust their future expectations for the current environment, and avoid taking on excessive risk to chase returns.
Merry Christmas and Happy New Year.
“We make a living by what we get, but we make a life by what we give.” - Winston Churchill
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendation for any individual. Although general strategies and / or opinions are revealed, this post is not intended to, nor does it represent or reflect, transactions or activity specific to any one account. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. All data and information is gathered from sources believed to be reliable and is not warranted to be correct, complete or accurate. Investments carry risk of loss including loss of principal. Past performance is never a guarantee of future results.