What a difference a year makes! A year ago, at this time the market was coming off a 20% correction in the fourth quarter reflecting prevailing headwinds of rising interest rate, escalating global trade tensions between the US and China, uncertainty on Brexit, and growing concerns of slowing global growth. Today conditions have calmed. Central banks around the world are dovish, including in the US, where the Fed moved to make mid-cycle adjustments in the midst of uncertainty and raised chances of extending the cycle. Likewise, around the world central banks seem accommodative with negative interest rates prevailing in several key countries around the globe. The US and China have apparently reached a Phase I trade deal and while the situation is tenuous and large structural hurdles remain in the areas of intellectual property, leaders of both countries seem to be more motivated to move toward more substantial agreements into 2020. With this backdrop, conditions appear favorable for economic growth in 2020.
This was also a solid year for investors. The S&P 500 was up 28%, its strongest year since 2013 and well above the 10% historical average. The US Bond market also recorded a very solid performance with the US Bond Index (Bloomberg Barclays US Aggregate Bond Index) up 8.67%, its strongest showing since 2002. The 60%stock/40%bond portfolio generated its highest returns in almost 20 years. The US market was a leader in 2019 but equity markets in key geographic regions were all up with Developed Markets (MSCI World ex USA) up 23% and Emerging Markets (MSCI Emerging Markets) up 19%.
Looking into 2020, the presidential election and perhaps impeachment proceedings will increasingly be in the headlines. Statistically, presidential election years are favorable. According to Morningstar/Ibbotson, since 1928 the S&P 500 has climbed 11.3%, on average, during presidential election years and in 19 out of 23 years the markets posted positive results.
With a constructive backdrop, global growth is likely edge higher in 2020, reducing risks of recession. This creates a more favorable environment for equities and generally a positive stock market outlook; including international markets; and emerging markets, specifically. But, 2019 will certainly be difficult to repeat in both equities and fixed income. While the equity and fixed income markets benefitted from declining rates in 2019, the dovish pivot by central banks appears to be over, so earnings growth may need to carry the market from here. Moreover, trade tension could re-escalate impacting global growth expectations. Fixed income yields and dividend yields on stocks are near lower bounds, making income opportunities elusive. Another risk could be that growth flattens and inflation rises. This could impact the negative correlation between stocks and bonds returns over time.
In one-way 2020 will be no different than most years – it will undoubtedly include some unforeseen event or issue. So, like all good New Years’ resolutions now it is a good time to re-evaluate your financial goals, volatility and risk tolerance, and time horizon. Investors who patient, disciplined, and adhere to, and consistently reassess their long-term plans tend to have the greatest success.