2019 proved to be an exciting and profitable year for investors.
The S&P 500, which tracks U.S. large-capitalization companies, returned 31.49% for the 12 months ending December 31st, 2019, the best annual return since 2013. This return outpaced the performance of 25.52% for the Russell 2000 index, a composite of U.S. small-capitalization stocks over the same period. U.S. markets continued to outperform international markets, with developed international and emerging market stocks returning 22.01% and 18.42%, respectively, as measured by the MSCI EAFE and MSCI EM indexes. In each case, these returns were higher than their long-term averages, and a welcome departure from 2018, where we saw negative returns in each of these asset classes. The leading segments of the economy shifted midway through the year from traditionally defensive sectors like Real Estate and Consumer Staples to more “cyclical” industries like Information Technology and Financials. This rotation resulted from an increase in investor confidence due to softening rhetoric that surrounded disputes with several trading partners and sustained growth in the U.S. economy.
Bond investors were rewarded with above-average returns as well, with the BBgBarc U.S. Aggregate Bond index returning 8.72%, a somewhat unusual occurrence, as years when stocks and bonds both beat their long-term averages are rare. We saw a stark about-face from the Federal Reserve regarding interest rates, with three interest rate cuts totaling 0.75%, compared to four interest rate hikes in 2018. 10-year treasury yields swung wildly throughout the year, ranging from 1.40% to 2.81%, settling at 1.91% at the end of the year, almost 0.8% lower than they started. Since prices move opposite to the direction of yields, this resulted in a positive return for bondholders.
Annual growth of the U.S. economy came in at 2.1% for the third quarter of 2019, lower than the 3% reported a year ago, but higher than some economists feared. Inflation remained contained at around 2.10%, and unemployment fell to 3.50% in November. This provided a backdrop for strong consumer spending, which represents two-thirds of the U.S. economy. This economic expansion, lasting 11 years, has now become the longest in U.S. history. However, the news was not all good. Business investment, in part representing capital expenditures by companies, fell by 2.30% from 2018, as companies continue to prefer buying back stock rather than investing in new equipment. Earnings per share growth was a paltry 1.27% for large U.S. stocks, compared to 23% in 2018, meaning most of the return came from investors paying more money for the same amount of earnings as last year.
The year began with a government shutdown and ended with only the third impeachment of a U.S. president, and in between saw strained trade relations, a Brexit failure, inverted yield curve, and turmoil in Asia and South America. And yet, the market headlines proved more volatile than the market reactions. We saw a move of one percent or more in U.S. large-cap stocks on only 36 trading days, compared to an average of 60 days in the past. Investors were rewarded for sticking to their long-term portfolio allocations, and those that panicked and sold after the December 2018 market correction missed out on some significant gains. Next week we will talk about what our expectations are for 2020 and beyond, and how investors can position themselves as the market environment changes.
- Jonathan A. Murdock
There is no assurance any of the trends mentioned will continue or forecasts will occur. The information has been obtained from sources considered to be reliable, but Raymond James does not guarantee that the foregoing material is accurate or complete. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Investing involves risk and you may incur a profit or loss regardless of strategy selected. Past performance is not indicative of future results. Asset allocation and diversification do not ensure a profit or protect against a loss.
Opinions expressed are those of Jonathan Murdock and not necessarily those of RJFS or Raymond James. All opinions are as of this date and are subject to change without notice.
THIS MATERIAL IS FOR INFORMATIONAL PURPOSES ONLY AND SHOULD NOT BE USED OR CONSTRUED AS A RECOMMENDATION REGARDING ANY SECURITY OUTSIDE OF A MANAGED ACCOUNT.
There is no assurance that any investment strategy will be successful or that any securities transaction, holdings, sectors or allocations discussed will be profitable. It should not be assumed that any investment recommendation or decisions made in the future will be profitable or will equal any investment performance discussed herein. Investing involves risk, including loss.
Fixed-income securities pose various risks including credit, market and liquidity, interest rate, reinvestment, legislative, and call risks. Specific sector investing can be subject to different and greater risks than more diversified investments.
Investing in small-cap and mid-cap stocks generally involves greater risks, and, therefore, may not be appropriate for every investor. International investing also involves special risks, including currency fluctuations, different financial accounting standards, and possible political and economic volatility. There is an inverse relationship between interest rate movements and fixed income prices. Generally, when interest rates rise, fixed income prices fall and when interest rates fall, fixed income prices generally rise. Commodities trading is generally considered speculative because of the significant potential for investment loss.
Specific sector investing such as real estate can be subject to different and greater risks than more diversified investments. Declines in the value of real estate, economic conditions, property taxes, tax laws and interest rates all present potential risks to real estate investments.
ASSET CLASS RETURNS: Source: Russell, Bloomberg Barclays, Dow Jones, JP Morgan, Morningstar Direct
S&P 500 SECTOR RETURNS: [Source: Standard & Poor’s] Returns are based on the GICS Classification model. Returns are cumulative total return for stated period, including reinvestment of dividends.
STYLE RETURNS: [Source: Russell] Style box returns based on the GICS Classification model. All values are cumulative total return for stated period including reinvestment of dividends. The Indices used from L to R, top to bottom are: Russell 1000 Value Index, Russell 1000 Index, Russell 1000 Growth Index, Russell Mid-cap Value Index, Russell Mid-cap Index, Russell Midcap Growth Index, Russell 2000 Value Index, Russell 2000 Index, and Russell 2000 Growth Index.
INTERNATIONAL EQUITY STYLE RETURNS, AND FOCUS ITEMS: Source: Morningstar Direct
FIXED INCOME SECTORS: [Source: Bloomberg Barclays] Returns based on the four sectors of Barclays Global Sector
Classification Scheme: Securitized (consisting of U.S. MBS Index, the ERISA-Eligible CMBS Index, and the fixed-rate ABS Index), Government Related (consisting of U.S. Agencies and non-corporate debts with four sub sectors: Agencies, Local Authorities, Sovereign, and Supranational), Corporate (dollar denominated debt from U.S. and non-U.S. industrial, utility, and financial institutions issuers), and Treasuries (includes public obligations of the U.S. Treasury that have remaining maturities of one year or more). Please note that all indices are unmanaged and investors cannot invest directly in an index. An investor who purchases an investment product which attempts to mimic the performance of an index will incur expenses that would reduce returns. Past performance is not indicative of future results.
BBgBarc EM Hard Currency Aggregate: Covers countries and sectors of the emerging markets fixed income investment universe, which includes USD-denominated emerging markets corporate and government-related debt.
BBgBarc Global Agg. ex-U.S. Dollar: Measures changes in global investment-grade, fixed-rate debt markets. It combines non-U.S. dollar-denominated versions of the Pan-European Index and the Japanese, Canadian, Australian and New Zealand components of the Global Treasury Index.
BBgBarc U.S. Aggregate Bond Index: Measures changes in the fixed rate debt issues rated investment grade or higher by Moody’s Investors Service, Standard and Poor’s, or Fitch Investor’s Service, in that order. The Aggregate Index is comprised of the Government/Corporate, the Mortgage-Backed Securities, and the Asset-Backed Securities indices.
BBgBarc U.S. Corporate Investment Grade: A component of the U.S. Credit index. Publicly issued U.S. corporate and specified foreign debentures and secured notes that meet the specified maturity, liquidity, and quality requirements. To qualify, bonds must be SEC-registered.
BBgBarc U.S. Government: The U.S. Government component of the U.S. Government/Credit Index comprised of securities issued by the U.S. Government; also including public obligations of the U.S. Treasury with remaining maturity of one year or more, and publicly issued debt of U.S. Government agencies, quasi-federal corporations, and corporate or foreign debt guaranteed by U.S. Government. Must be a publicly issued, dollar-denominated and nonconvertible. Must be rated investment-grade (Baa3/BBB- or higher) by at least two of the following rating agencies: Moody’s, S&P, Fitch; regardless of call features, have at least one year to final maturity, and have an outstanding par value amount of at least $250 million.
BBgBarc U.S. High Yield 2% Issuer Cap index: Issuer-constrained version of the flagship US Corporate High Yield Index, which measures the USD-denominated, high yield, fixed-rate corporate bond market. The index follows the same rules as the uncapped version, but limits the exposure of each issuer to 2% of the total market value and redistributes any excess market value index wide on a pro rata basis.
BBgBarc U.S. Municipal Bond Index: Covers the USD-denominated long-term tax exempt bond market. The index has four main sectors: state and local general obligation bonds, revenue bonds, insured bonds, and prerefunded bonds local general obligation bonds, revenue bonds, insured bonds, and prerefunded bonds.
BBgBarc U.S. Securitized: The index is a composite of asset-backed securities, collateralized mortgage-backed securities (ERISA-eligible) and fixed rate mortgage-backed securities.
BBgBarc U.S. Treasury: A component of the U.S. Government Index. Must be publicly issued, dollar-denominated and nonconvertible, fixed rate (although it may carry a coupon that steps up or changes according to a predetermined schedule) U.S. Treasury security. Must be rated investment-grade (Baa3/BBB- or higher) by at least two of the following rating agencies: Moody’s, S&P, Fitch; regardless of call features, have at least one year to final maturity, and have an outstanding par value amount of at least $250 million.
Bloomberg Commodities Index: Provides a diversified representation of commodity markets as an asset class. The index is comprised of exchanged-traded futures on physical commodities; representing 20 commodities which are weighted for economic significance and market liquidity. To promote diversification, weighting restrictions are placed on individual commodities and commodity groups.
MSCI EAFE (Europe, Australasia, Far East): A free float-adjusted market capitalization index that is designed to measure developed market equity performance, excluding the United States & Canada. The EAFE consists of the country indices of 21 developed nations.
MSCI EAFE Growth: Represents approximately 50% of the free float-adjusted market capitalization of the MSCI EAFE index, and consists of those securities classified by MSCI as most representing the growth style.
MSCI EAFE Small Cap: Offer an exhaustive representation of this size segment by targeting companies that are in theInvestable Market Index but not in the Standard Index in a particular developed market. The indices include Value and Growth style indices and industry indices based on the Global Industry Classification Standard (GICS).
MSCI EAFE Value: Represents approximately 50% of the free float-adjusted market capitalization of the MSCI EAFE index,and consists of those securities classified by MSCI as most representing the value style.
MSCI Emerging Markets: A free float-adjusted market capitalization index that is designed to measure equity marketperformance of emerging markets. As of July 2, 2014, the index consists of the following 23 emerging market country indices: Brazil, Chile, China, Colombia, Czech Republic, Egypt, Greece, Hungary, India, Indonesia, Korea, Malaysia, Mexico, Peru, Philippines, Poland, Qatar, Russia, South Africa, Taiwan, Thailand, Turkey, and the United Arab Emirates.
Russell 2000: Measures the performance of the 2,000 smallest companies in the Russell 3000 Index, which represent approximately 10% of the total market capitalization of the Russell 3000 Index.
Russell Mid-cap: Measures the performance of the 800 smallest companies of the Russell 1000 Index, which represent approximately 31% of the total market capitalization of the Russell 1000 Index.
Standard & Poor’s 500 (S&P 500): Measures changes in stock market conditions based on the average performance of 500 widely held common stocks. Represents approximately 68% of the investable U.S. equity market.
The Dow Jones Global Select REIT Index: intends to measure the performance of publicly traded real estate securities. The indices are designed to serve as proxies for direct real estate investment, in part by excluding companies whose performance may be driven by factors other than the value of real estate. This index represents equity real estate investment trusts (REITs) and real estate operating companies (REOCs) traded globally.
Small-Cap Stocks refers to a company’s capitalization as determined by the total market value of its publicly traded shares.
Large-Cap Stocks are generally defined as those with market capitalizations of more than $10 billion.
Energy Sector is a category of stocks that relate to producing or supplying energy.
Commodity is a basic good used in commerce that is interchangeable with other commodities of the same type.
Commodities are most often used as inputs in the production of other goods or services.
Fixed Income is a type of investment in which real return rates or periodic income is received at regular intervals and at reasonably predictable levels.
High-Yield Bond is a high paying bond with a lower credit rating than investment-grade corporate bonds, Treasury bonds and municipal bonds.
International: This asset class represents managers that seek long term capital appreciation by investing primarily in companies outside of the United States, including emerging markets in some instances. Companies of all cap sizes may be considered. Investments are primarily ADR equities and may be subject to additional risks such as currency fluctuations, differing financial accounting standards by country, and possible political and economic risks.