Fidelity Bank - Wealth Management
December 2019 Market Review
2019 was the year of the “rally of everything”. Risk assets simultaneously rose with safe haven assets as investors confronted a multitude of geopolitical uncertainties and recession fears mounted in the face of weaker economic data. After the sharp falls in equities during the fourth quarter of 2018, 2019 brought a strong rebound, as central banks signaled that rather than raise interest rates they would pause or yet cut interest rates to try to keep the decade-old economic expansion intact. In October of 2018, markets were pricing in about three interest rate hikes by the Fed in 2019, however, that did not come to pass, and instead the Fed cut interest rates three times in 2019. With this downward pressure on rates, bond investors enjoyed their best year since 2002, with the Bloomberg Barclays US Aggregate Bond Index rising 8.72%. In addition to the disastrous fourth quarter of 2018, a heightened unease surrounding global trade shook equity market investors between “risk-on” and “risk off” for much of the year. Finally, in December, after much consternation, The US and China agreed to a “phase one” trade deal that should lay the groundwork for improved US-China relations and increased clarity for global trade. With this trade deal, some bad economic data and some bumps along the way in 2019, US stocks managed to post their best year since 2013 with the S&P 500 Index rising 31.49%.
High Quality Stocks finished out 2019 as the best performing US asset class beating the S&P 500 by 6.95% (38.44% vs. 31.49%). From a style perspective, Large Cap Growth and Small Cap Growth stocks bested their Value brethren by 9.85% (R1000G: 36.39% vs. R1000V: 26.54%) and 6.09% (R2000G: 28.48% vs. R2000V: 22.39%), respectively.
Interestingly, almost all of the returns in US stocks were driven by an increase in the price to earnings multiple. That is, investors were willing to pay more and more for the same or less amount of earning per share from stocks. In other words, trailing 12-month earnings per share for the S&P 500 actually declined 1.50% from the end of 2018 (S&P 500 EPS: 12/31/18: $151.75; 12/31/19: $149.50). To add up the contributions to return, price to earnings multiple expansion provided a return of about 30.90%, earnings growth subtracted a return about 1.50% and dividends added about 2.10% to total return.
All the Global Industry Classification Standard sectors (GICS) posted double digit returns in 2019 with Technology leading the way, gaining 50.29%. Technology outpaced the next highest gaining sector by almost 20% (Financials: +32.13%). Apple (2019: +88.97%) and Microsoft (2019: +57.57%), which on average comprised about 36% of the Technology index, accounted for about 50% of the sector’s return in 2019. The other 64% of the index, approximately 72 holdings, contributed the rest of the return. Energy, which was the laggard sector, advanced by a healthy 12.09%.
For 2019, Dollar strength added to returns for US investors in Developed Markets and Emerging Markets. The Bloomberg Dollar Index, which measures the US Dollar against Developed Market currencies, lost about 0.93% in 2019. The MSCI EAFE index gained 21.67% in local currency terms but gained 22.01% in US Dollar terms. The MSCI Emerging Market Currency Index gained by 3.12% versus the US Dollar in 2019. The MSCI Emerging Markets index gained 18.06% in local currency, but the conversion to US Dollars caused that gain to increase to 18.42% for US investors. The “phase one” trade deal between the US and China helped push the MSCI Emerging Market Index higher by 7.16% in December alone.
For much of the year, there was significant concern about an inversion of the Treasury Yield Curve, that is, short-term treasury rates that are higher than longer-term treasury rates. Historically, this has been a good indicator of an upcoming recession. During 2019, the 10-Year Treasury and the 3-Month Treasury, among other maturities, had inverted yields. The 10Y-3M inversion reached its widest gap of 51.38 basis point at the end of August as recession fears were spiking. From that point, the inversion dissipated and the last few months of 2019 saw the yield curve return to a more normal upwardly sloping curve, as the Federal Reserve cut rates three times in four months in an attempt to stave off an economic contraction and boost confidence.
In the Federal Reserve’s rate hiking cycle from 2015 to 2018, the 10 Year Treasury Yield peaked at about 3.24% in early November 2018. By September 2019, with Fed rates cuts, and recessionary fears brewing, the 10 Year Treasury Yield had fallen 178 basis points to about 1.46%, the lowest level since July 2016. From the start of 2019, as rates fell across the yield curve, the Bloomberg Barclays Treasury Bond Index gained 6.86%.
The falling yield curve led to some significant spread compression that drove returns for Investment Grade and High Yield Credit. High Yield Bonds rallied 14.32% in 2019. High Yield spread to 10 Year Treasury bonds fell by 199 basis points from 5.27% to end the year at 3.27%. The long-term average spread is about 5.13%. High Yield bonds yielded approximately 5.19% at the end of 2019. Investment Grade Corporates rose 14.54% for the year as rates fell and Investment Grade spread to 10 Year Treasuries narrowed by about 60 basis points.
In international fixed income, German 10 Year Bunds ended the year marching back toward positive territory. At their lowest in August, German 10 Year Bunds yielded negative 71.6 basis points. At the close of 2019, German 10 Year Bund yielded negative 18.8 basis points. The rebound toward positive rates comes on the back of higher expectations for economic growth and inflation in the Eurozone. The world has seen its stockpile of negative yielding debt shrink from about $17 trillion at the end of August to about $11 trillion at the end of 2019.
Emerging Market’s currency strength added to Emerging Markets Debt during the year, helping the asset class gain about 13.50%. Positive trade deal news aided the asset class in gaining 4.13% in December. The chart below pulls apart what factors contributed to Emerging Markets Debt 2019 returns by proxying the asset class with the T. Rowe Price Emerging Markets Bond Fund (TEIMX).Duration (price sensitivity to a change in rates) and coupon contributed the most (7.39% and 5.43%, respectively) while currency oscillated throughout the year, adding and detracting from returns. Ultimately, currency added about 1.20% to Emerging Markets Debt’s returns.
In the 2019 “rally of everything”, the Bloomberg Commodity Index did not put up gains as large as the equity markets but gained a solid 7.69%. Palladium, Oil and Unleaded Gasoline had an exceptional, yet volatile, year. While they gained, 59.27%, 44.49% and 34.44%, respectively, each of these commodities experienced at least one intra-year decline of nearly 20% or more in 2019. Despite the rally in several energy commodities, Natural Gas did not fare well, declining 25.29% during 2019. Gold, which is often viewed as the ultimate safe haven asset, rose 18.30% in 2019, with the majority of those gains coming from June through September as recession fears spiked. REITs were positive in 10 out of 12 months in 2019 and gained 28.66% for the year. This was REIT’s best year since 2006.
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December 2019 Market Review is intended solely to report on various investment views held by Fidelity Deposit & Discount Bank and is distributed for informational and educational purposes only and is not intended to constitute legal, tax, accounting or investment advice. Opinions, estimates, forecasts, and statements of financial market trends that are based on current market conditions constitute our judgment and are subject to change without notice. Fidelity Deposit & Discount Bank does not have any obligation to provide revised opinions in the event of changed circumstances. All data is provided by Bloomberg Finance, LP and Morningstar Direct. We believe the information provided here is reliable but should not be assumed to be accurate or complete. Data as of 12/31/2019. References to specific securities, asset classes and financial markets are for illustrative purposes only and do not constitute a solicitation, offer or recommendation to purchase or sell a security. Past performance is no guarantee of future results. All investment strategies and investments involve risk of loss and nothing within this report should be construed as a guarantee of any specific outcome or profit. Investors should make their own investment decisions based on their specific investment objectives and financial circumstances and are encouraged to seek professional advice before making any decisions. Index performance does not reflect the deduction of any fees and expenses, and if deducted, performance would be reduced. Indexes are unmanaged and investors are not able to invest directly into any index. The S&P 500 Index is a market index generally considered representative of the stock market as a whole. The index focuses on the large‐cap segment of the U.S. equities market.