Fourth Quarter Market Review
The Merriam-Webster dictionary defines déjà vu as a) the illusion of remembering scenes and events when experienced for the first time and b) a feeling that one has seen or heard something before. Both definitions are apropos for how the markets performed in 2019. In fact, market results in 2019 felt reminiscent of 2017 (only better), when markets experienced little volatility and reached new all-time highs. Tracking volatility in the S&P 500 by the number of days where the index rises or falls by 1% or more shows this happened only 38 times in 2019, compared to an average of 53 times since 1958. The lack of volatility was largely due to the Federal Reserve stating it would “act as appropriate to sustain the expansion”, providing the market with several interest rate cuts as insurance against market and geopolitical uncertainties.
The strong market performance more than offset 2018’s losses, with virtually all major asset classes moving higher. Global equities generated their best returns in a decade, largely due to easing trade tension between the U.S. and China and aggressive central bank stimulus more broadly. All S&P 500 sectors were higher by double digits, with technology up almost 50%, while the laggard, energy, was up over 12%. Commodities in general were a bright spot, as gold registered its best performance since 2010 and oil (WTI crude) was higher by 34%.
Despite a year of uncertainty (fears of a government shutdown, BREXIT, slowing growth, a misstep by the Fed, etc.), politics proved more sound than fury and the market continued to discount the relevance of these events. Equity performance had less to do with profit growth and more to do with the growth in market multiples as investors indicated their willingness to pay more for every dollar of a company’s earnings. We feel that 2020 could be dictated by growth in earnings rather than market sentiment. Growth-oriented equities continued to outpace value-oriented names, while large cap stocks bested small company stocks. Cyclical stocks outpaced defensive stocks on average.
Although the biggest financial story of 2019 was the U.S.- China trade dispute, it had limited impact on investors who managed to cope through the headline noise. It’s also helpful to remember that the fourth quarter of 2018 was quite volatile, with the Fed raising interest rates in the face of slowing global growth and an inverted yield curve signaling a looming recession. By January of this year, the Fed said they would be “patient” with future rate increases, calming markets. At its March meeting, the Fed projected no further rate hikes. In June the committee said they would “act as appropriate”, and by July the Fed started to cut rates as part of a “mid-cycle adjustment”. A year ago, the Federal Reserve was raising interest rates and by the middle of 2019 was cutting them, causing bond prices to spike and the yield curve to steepen again. This year was unusual for bond returns, with performance that looked more like stocks than the lower yielding investments one should expect in the current low rate environment.
With the S&P 500 generating its best result since 2013, there are still many positives going into 2020, including an accommodative Federal Reserve, a fiscally healthy consumer, solid retail sales data, low inflation, and gains in employment figures. Taking a more balanced view however, high valuations in U.S. equities and global fixed income, coupled with an increase in volatility due to heightened political tensions and a year full of presidential political implications could mute our overall sanguine view of the markets. To this end, we are committed to our tried and true approach of investing client assets for the long term, building globally diversified portfolios designed to withstand bumps in the road. We thank our clients and friends for their trust and support as we head into what we hope will be another successful new year and welcome any opportunity to help your family and friends reach their goals.
Important Note: This material is for informational purposes only and is not intended to serve as a substitute for personalized investment advice or as a recommendation or solicitation of any particular security, strategy or investment product. Madison Wealth Management does not provide tax, legal or accounting advice. © Madison Wealth Management 2020
