Plum Street Advisors
Q4 2019 Market Commentary – January 8, 2020
Despite several headwinds, the global markets were buoyant in 2019. US-China tariffs increased throughout the year, domestic corporate earnings leveled off, global growth is slowing, and Brexit looks sure to happen. Still, the US stock market was extraordinarily resilient with a total return of 31% for the S&P 500 last year. Equally remarkable was a solid 9% return for the bond market (as measured by the Barclays Aggregate Bond Index) in a year when the interest rate yield on that index hovered around 2%.
Even in hindsight, it takes some unpacking to understand how the market had its best year since 2013 (and just a hair short of the best return since 1997). It’s important to remember that the market first fell sharply late in 2018 (the S&P 500 was down 14% in the fourth quarter of last year) as concerns mounted about an economic slowdown, Federal Reserve rate hikes, and rising tensions in the US-China trade war. So, a good part of the early 2019 gain was just a relief rally gaining back the sharp losses of the prior quarter.
Internationally, there is a different sentiment about trade as we start 2020. The signing of the US-Mexico-Canada trade deal and the upcoming signing of “phase one” of the US-China tariff agreement on January 15 are encouraging the market to believe we may be on the downward sloping side of the tariff war. In reality a “phase two” of the US-China deal may not come until after the election, if ever, but the market was happy that the threatened December 15th tariffs did not go through.
Domestically, despite slowing manufacturing growth, the strength of the consumer is pushing the economy forward. Also, the Fed’s decision to shift from raising rates in 2018 to cutting them in 2019 helped turn around market sentiment. Consumer confidence remains high, unemployment low, and holiday retail sales increased year over year.
It was another good quarter for stocks, with strong gains across the board. For the quarter, emerging markets and US small company stocks led the main equity indexes, but for the year large US company stocks won the day. 2019 was a year in which almost every asset class rose, from stocks to bonds to many commodities.
US large company stocks, as measured by the Russell 1000, had a total return of 9% for the quarter and 31% for the year. US small company stocks, as measured by the Russell 2000, had a total return of 10% for the quarter and 26% for the year. Tech stocks outperformed more value-oriented stocks in 2019.
The total return of the MSCI EAFE index of developed countries (USD, net) was 8% in the quarter and 21% for the year. Emerging markets surged in the fourth quarter, as the MSCI Emerging Markets index (USD, net) gained 12%, pushing its full year return to a respectable 18%.
The Federal Reserve reduced its benchmark rate three times in the second half of the year to combat slowing growth – twice in the third quarter and once in the fourth quarter.
For the quarter, the 10-year interest rate slightly increased, as the last rate cut had already been widely anticipated, and bond returns were close to flat.
For the year, the 10-year interest rate declined from 2.7% at the beginning of the year to 1.9% at the end. As bond rates decline the price of existing bonds rises, and the Bloomberg Barclays US Aggregate Bond index rose 9% for the year. Global bonds, TIPS, and short term bonds all gained in value as well, albeit to a lesser extent.
Commodities and Currencies
Energy prices started the year at $45 (WTI crude spot price), rose early in the year into the $50s and low $60s, were range-bound for much of the rest of the year, and then closed the year at the high end of the range at $62 as middle east tensions grew.
Gold rose fairly steadily throughout the year. It added only a modest 2% in the fourth quarter, but as global volatility increased and as interest rates declined throughout the year, precious metals gained significantly in value. The gold spot price rose over 18% in 2019.
The dollar has stayed strong in 2019, as the US economy outperformed much of the rest of the world, but in the final quarter of the year, as prospects improved in several regions, the dollar fell slightly, giving a tailwind to assets denominated in non-US currencies.
The markets gave plenty to cheer about last year, and people’s retirement savings accounts are looking healthier than a year ago. Some of the main concerns from last quarter have abated at least somewhat, as trade disputes are being resolved and the Fed has become more accommodative in its policy. Still, it’s important to remain ever-vigilant as there are plenty of risks that remain on the horizon.
In the US we’re heading into an election in 2020, with all the uncertainty that entails. Of course, which party controls Congress after the elections will have a lot to do with whether the next President’s agenda will make any headway. Recently, there’s also been increasing concern about geopolitical risk in the form of Middle East tensions. The killing of Irani General Qassem Soleimani by the US and the subsequent Iranian missile attack on US bases in Iraq added volatility to oil prices and the markets overall.
Continued uncertainty ahead warrants holding a diversified portfolio positioned to benefit from growth while hedging visible (and not-yet-visible) risks. Plum Street Advisors continues to focus on long-term returns, while emphasizing a well-planned strategic allocation that seeks to offer protection against market volatility.