In many ways, 2019 was a year of records. In just twelve months, the S&P 500 Index, which represents US large-cap stocks, closed at record highs on 35 separate occasions.¹ Large-cap stocks ended the year up a very strong 31.4%; they have returned 30% or more in a year only 30 times in the last 230 years.² US Stocks were not the only area in which strong returns could be found, as all major equity asset classes and even higher-yielding bond sectors posted double-digit returns for the year. In contrast to the dismal fourth quarter of 2018, where all major equity indexes were down significantly, the fourth quarter of 2019 capped off a stellar market run. Given these disparate events, it’s natural to wonder, why was 2019 different? In many ways, it appears to come down to investor sentiment.
Let’s rewind the clock to Q4 2018. In December 2018 the US Federal Reserve followed through on its plan to raise interest rates for the fourth time that year. There was fear about global trade tensions and slowing growth, and the market experienced a December sell-off on a scale not seen since 1931.³
Fast forward to 2019 and the mood was decidedly different. The Fed took a stance of appeasement, saying that it would react as necessary to ensure the continuing US economic expansion. The Fed cut rates three times in 2019, and that, in tandem with strong US economic data and optimism about a phase one US-China trade resolution, helped fuel the rally we saw in the fourth quarter.
US large-cap and small-cap stocks had great returns last quarter and last year. While there were signs later in the year that the value and size (small cap) premia may be coming back, growth and large-cap again outperformed for the full year.
World Asset Classes
Returns for the Fourth Quarter and 2019
The US Dollar, represented by the ICE U.S. Dollar Index, weakened modestly in the fourth quarter, which supported international equity returns for US-based investors. While international stock returns did not match domestic returns, they exceeded their long-term averages by substantial margins.
US investment-grade bonds were little changed for the quarter but returned almost 9% for the year. US Municipal bonds gained 1.7% for the quarter and were up 5.6% for the year. After rising sharply last year, interest rates fell in 2019 once again, as the Fed changed course from tightening in 2018 to easing in 2019, as mentioned above.
High yield bonds rose 15.1% for the year (2.6% for the quarter). Emerging markets bonds also returned double digits, spurred by the rate cuts seen across many developed countries and the “risk-on” mentality evinced by many market participants. Both asset classes outperformed their higher quality counterparts, in part highlighting why we allocate a modest portion of your bond investments to these sectors to increase global diversification and enhance long-term expected returns.
2018 and 2019 were a pair of unusual years. In 2018, virtually all asset classes posted negative returns and the average investor became increasingly wary about the future. In 2019, fueled by a pivoting Fed and increased optimism about global economic resilience, those same asset classes came roaring back and achieved returns well above their long-term averages. Investors who resisted the pessimism so prevalent at the end of 2018 were well rewarded for staying the course last year.
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¹Yun Li, “Nasdaq crosses 9,000, Dow and S&P 500 notch new highs as year‐end rally rolls on”, CNBC, December 26, 2019. One additional market high on 12/27.
Dow Jones Industrial Average Index: measures the performance of 30 large, publicly-owned companies trading on the New York Stock Exchange (NYSE) and the NASDAQ.
Russell 3000 Index (U.S. Stock Market): measures the performance of the largest 3,000 U.S. companies representing approximately 98% of the investable U.S. equity market. These securities are traded on the NYSE, NYSE MKT, and NASDAQ.
S&P 500 Index (Large Cap U.S. Stocks): measures the performance of large-capitalization U.S. Stocks. It is a market-value-weighted index of 500 stocks that are traded on the NYSE, NYSE MKT, and NASDAQ. The weightings make each company’s influence on the Index performance directly proportional to that company’s market value.
Russell 2000 Index: An unmanaged index that measures the performance of the small-cap segment of the U.S. equity universe. It is a subset of the Russell 3000 Index, representing approximately 10% of the total market capitalization of that index and includes approximately 2,000 of the smallest securities based on a combination of their market cap and current index membership. Russell Investment Group owns the Russell Index data, including all applicable trademarks and copyrights.
MSCI EAFE Index (International Developed Stocks): The MSCI EAFE Index (Europe, Australasia, Far East) is a free float-adjusted market capitalization-weighted index that is designed to measure the equity market performance of developed markets, excluding the U.S. & Canada. The MSCI EAFE Index consists of the following 22 developed market country indices: Australia, Austria, Belgium, Denmark, Finland, France, Germany, Greece, Hong Kong, Ireland, Israel, Italy, Japan, the Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland, and the United Kingdom.
MSCI Emerging Markets Index (Emerging Markets Stocks): is a Morgan Stanley Capital International Index that is designed to measure the performance of equity markets in 23 emerging countries around the world.
Bloomberg Barclays US Aggregate Bond Index (U.S. Bond Market or Investment Grade U.S. Bonds): includes U.S. government, corporate, and mortgage-backed securities with maturities of at least one year.
Bloomberg Barclays Muni Bond Index 1-10 Yr Blend (1-12) (Int-Term Municipal Bonds or US Municipal Bonds): A market value-weighted index which covers the short and intermediate components of the Barclays Capital Municipal Bond Index. The 1-10 Year Municipal Blend index tracks tax-exempt municipal General Obligation, Revenue, Insured, and Prerefunded bonds with a minimum $5 million par amount outstanding, issued as part of a transaction of at least $50 million, and with a remaining maturity from 1 up to (but not including) 12 years.
ICE BofA Merrill Lynch U.S. High Yield, BB-B Rated, Constrained Index (High Yield U.S. Bonds): Tracks the performance of US dollar-denominated below-investment-grade (BBB rated) corporate debt publicly issued in the US domestic market. Qualifying bonds are capitalization-weighted provided the total allocation to an individual issuer does not exceed 2%. Issuers that exceed the limit are reduced to 2% and the face value of each of their bonds is adjusted on a pro-rata basis.
JPM GBI EM GD USD Unhedged Index (Emerging Markets Bonds): The JP Morgan EMBI Global Diversified is a uniquely weighted index that tracks total returns for U.S. dollar-denominated Brady bonds, Eurobonds, traded loans, and local market debt instruments issued by sovereign and quasi-sovereign entities. The index limits the weights of countries with larger debt stocks by only including a specified portion of these countries’ eligible current face amounts of debt outstanding.
JPM EMBI GD Index: J.P. Morgan Emerging Markets Bond Global Diversified Index (EMBI Global Diversified) tracks the returns for U.S. dollar-denominated debt instruments issued by emerging market sovereign and quasi-sovereign entities: Brady bonds, loans, Eurobonds. The index limits the exposure of some of the larger countries.